SPECIAL REPORT: RBNZ November Preview

*Markets pricing in a rate cut but will RBNZ deliver?
*Will weak NZ inflation expectations data be the tipping point?
*Implied volatility suggests significant range through announcement

When?

The result of the RBNZ's rate decision should be seen at 12pm AEDT accompanied by the RBNZ Monetary Policy statement. An hour later at 1pm AEDT markets will be closely monitoring the language within the RBNZ's press conference.

What's expected?

As it stands market pricing leans towards a 25bps rate cut, somewhat contrasting the temporary pause in easing seen across G10 central banks out till end of year. Expectations at time of writing drawn from short-term rate futures imply an 80% chance that the RBNZ cut on Wednesday with the rest of the 20% attributed to a hold. That equates to around 20bps of easing priced in. We believe there is a strong possibility that RBNZ deliver on cut expectations but keep the door ajar for a potential hold of the official cash rate, currently at 1.00%. It could be a close call, closer then what's priced in.

NZ Overnight Implied Volatility (%) rockets higher. Source: Eikon

External cues

Along with other central banks, RBNZ are set to also recognise the fact that broader risks in US-China trade and slowdown in global growth have subsided in October. This should go some distance in appeasing areas of concern around trade policy uncertainty flagged in their previous September meeting. See our RBNZ September Preview for a recap.

Domestic cues

In terms of the arguably more significant state of the NZ domestic economy, we note some key data points which have fallen since the last meeting and are likely to have a strong influence on the RBNZ's decision. These include:

Oct Business Outlook -42.4; prior -53.5. Marginally hawkish
Q3 CPI y/y beat 1.5%; est. 1.4%; prior 1.7%. Marginally hawkish
Q3 Unemployment 4.2%; est. 4.1%; prior 3.9%. Dovish
Q3 Job Growth 0.2%; est. 0.3%; prior 0.8%. Dovish
Q3 Labour Inflation y/y 2.3%; est. 2.3%; prior 2.2%. Neutral
NZ Inflation Expectations survey 1.8%; prior 1.86%. Dovish

Net net softer inflation expectations and Q3 job figures stand to be the tipping point for RBNZ to ease rates on Wednesday; Westpac have called for a rate cut based on the inflation expectations print. However, conversely, better than expected Q3 CPI figures and an improved Oct. Business Outlook could temper those dovish advances.

Reaction

NZ Overnight implied vol. or uncertainty in the options market has rocketed to ~17.7% ahead of Wednesday's RBNZ rate decision, suggesting the daily range for NZDUSD could be in the realm of 100-110bps. We feel this is a fair assessment given the closeness of the call.

Therefore, in line with a wider range, we note some multi-month pivot levels to keep an eye on.
Spot: 0.6333
Upside: 0.6443 (+110pips), 0.6465 (+132pips)
Downside: 0.6239 (94pips), 0.6204 (-129pips)