RBNZ Governor Hawkesby indicated that upcoming meetings are open for discussion, with the OCR expected to reach around 2.5%. The rate of further cuts will rely on new data, with no decisions finalised yet.
Hawkesby mentioned a historical first with a 4–2 voting split at the bank. He also expressed the intention to have a new MPC member by the October meeting. Despite changes, the RBNZ’s stance on the neutral rate remains constant, with the OCR no longer seen as restrictive.
Fiscal Outlook and Economic Activity
The fiscal outlook shows a reduction in government spending, aiding in inflation control. Q2 economic activity was weaker than predicted. The RBNZ observed slower than anticipated growth in house prices and suggested cautious behaviours from businesses and consumers could lead to additional policy measures.
Previous easing measures, amounting to 250 basis points, are expected to bolster growth. The RBNZ is at ease with the decline in the NZD.
With the Reserve Bank of New Zealand signaling more rate cuts are on the way, the path of least resistance for the New Zealand dollar is lower. The bank has explicitly stated it is comfortable with the fall in the NZD, which we see as a green light to establish short positions. This dovish stance is especially pronounced when compared to the RBA, which held rates steady last month, making short NZD/AUD an attractive trade.
We should look to position for lower interest rates through the derivatives market, particularly by receiving on one-year swaps or buying 90-day bank bill futures. Recent online data shows swap markets are now pricing a near 80% probability of a 25 basis point cut by the October meeting, up from just 45% last week. The stated projection of a trough near 2.5% from the current 3.75% OCR implies at least five more cuts are coming over the next year or so.
Data Driven Strategy for Options Traders
The key takeaway is that the pace of easing is entirely data-dependent, creating opportunities for options traders. The bank’s reference to weaker-than-expected Q2 economic activity, which statistics confirmed last month with a 0.2% contraction in GDP, means the next CPI and employment releases will be pivotal. We expect implied volatility to rise ahead of these events, suggesting buying straddles could be profitable.
Historically, when the RBNZ enters an easing cycle with weakening growth, it tends to move decisively. Looking back to the 2015 easing cycle, the bank cut rates by 125 basis points in under a year as dairy prices and global growth faltered. With recent data showing business confidence at a nine-month low and reports that China’s manufacturing output has slowed, the parallels suggest the bank may act faster than currently priced.
Caution is warranted as the bank’s comments on falling government spending helping inflation could temper the pace of cuts if growth data surprises to the upside. However, the mention that cautious businesses and consumers might prompt more policy action reinforces the dovish bias. We should therefore treat any strength in the NZD as a selling opportunity in the weeks ahead.
