RBNZ Preview: Dovish shift priced in, NZD/USD to rise?

• The RBNZ is expected to leave rates unchanged but may express more concern.
• The recent plunge in NZD/USD shows markets are already pricing in a dovish shift.
• An upside move in the kiwi cannot be ruled out.

The Reserve Bank of New Zealand announces its first rate decision for 2019 on Wednesday, February 13th, at 1:00 GMT. Governor Adrian Orr will meet the press at 2:00 GMT.

The RBNZ has last changed interest rates in November 2016, when it cut the Official Cash Rate from 2% to 1.75%. Since then, the Wellington-based institution has been focused on only guiding markets since then. 

This time, the guidance will likely be dovish, opening the door to a rate cut, albeit not shortly.

Why is a dovish shift expected?

Weak data

New Zealand published a very disappointing jobs report last week. Employment grew by a meager 0.1% in Q4 and on top of downside revision to Q3, which saw an expansion of 1%. The unemployment rate also fell short of expectations, rising to 4.3% against 4.1% expected. And even the labor cost index did not meet early projections by rising by only 0.5%.

Another sign of a local slowdown came from a minimal rise in quarterly inflation: 0.1% in the last quarter of 2018. We still do not have GDP data for Q4, but Q3 saw a significant slowdown: 0.3% QoQ against 1% in the previous quarter.

All in all, domestic data is not going in the right direction.

Worsening global picture

China, the world's second-largest economy and a large buyer of New Zealand milk, saw the slowest yearly growth in 28 years last year: 6.6%. One of the reasons is the trade war with the US. New Zealand is a staunch supporter of global trade and suffers from the worsening picture.

Perhaps the most-significant sign from the outside comes from Australia. New Zealand's neighbor in the South Pacific. The Reserve Bank of Australia released a dovish quarterly report, and Governor Phillip Lowe also changed his stance on interest rate from "higher chance they will go up than down" to neutral. 

Dovish shift already priced in

The RBNZ will, therefore, follow the footsteps of the RBA in a dovish change, and not only due to the neighbor's shift. The local and global picture have both worsened. Governor Orr and his colleagues may convey a message that the next move in interest rates is down.

However, a message alone will not be a surprise. The kiwi fell quite a bit on the jobs report, and traders already had the RBNZ decision in mind. 

Also, a quick read through analysts' expectations towards the RBNZ also points in that direction. 

So, if a darker picture is already on the cards, it may fail to push the New Zealand Dollar. We may even see a "buy the rumor, sell the fact" response: a jump in NZD/USD if the RBNZ only matches the RBA.

Potential Surprises

Outside the mainstream scenario stated above, there are two other scenarios with a lower probability.

The RBNZ could surprise by not only talking the talk but also walking the walk. They could slash the OCR to 1.50% and send the kiwi crashing. The Bank surprised markets in the past, albeit the distant past. 

Another surprise would be an upbeat message that will send the kiwi shooting higher. If the RBNZ sees the glass half and remains optimistic, NZD/USD could explode higher. Unemployment remains low, there is no danger of deflation, and New Zealand's openness means it does not directly suffer from the trade wars, only indirectly. This outcome I even more unlikely as the central bank does not want higher rates.

Conclusion

Given signs of economic weakness at home and abroad, the RBNZ is likely to warn about the worsening situation and open the door to a rate cut, but not imply any imminent move. As such an outcome is priced in, NZD/USD may "buy the fact" and rise instead of falling. A surprise cut would send the kiwi plunging and an upbeat message would send it shooting higher.