The NZD is up against all the major currencies over the past 24 hours after news that Adrian Orr had been confirmed as the new RBNZ Governor. There hasn’t been too much movement elsewhere, as markets tread water ahead of key events later this week (FOMC, ECB and BoE meetings, US CPI).
Adrian Orr will stand down from his role as CEO at the New Zealand Super Fund to take up the position as Governor. He was formerly Deputy Governor at the RBNZ and has extensive experience in central banking, including both monetary policy and financial stability.
The NZD moved up around 0.75% on the news of Orr’s appointment and it has extended those gains a little further overnight, although it remains within its recent 0.68 – 0.70 trading range. The NZD/AUD touched 0.92, the first time in more than 2 months, but has drifted back a little since. New Zealand yields also increased a few basis points late in the session. The 2 year swap rate was up 2 basis points to 2.17% while the 10 year rate was up 5 basis points to 3.13%.
The market reaction seems to imply that Orr will oversee a somewhat less dovish policy than his predecessor, with the RBNZ’s current projections not building in a rate rise until 2019. While it’s possible the new RBNZ Governor will see the economic landscape differently than the current leadership, we won’t know for sure until he has assumed the position next year and it seems a little early to speculate. The RBNZ will also have a committee deciding the OCR, of which the Governor will have only one vote (albeit an important one if he can influence the committee’s thinking).
Elsewhere, there’s been little movement in major global FX rates with no major economic data nor central bank speak overnight. News of an explosion in Times Square subway station in New York caused very little reaction, and US stocks pushed ahead a little further to a new record high.
Looking ahead to the next 24 hours, we get UK CPI and if it breaches 3% YoY the Governor of the Bank of England will need to write a letter of explanation to the Chancellor. The market doesn’t anticipate a second rate rise from the BoE until the end of next year given most of the inflationary impulse in the UK is coming from the (post-Brexit) falls in the pound. Following the more constructive mood around Brexit negotiations (including last week’s agreement to shift to “Phase 2” of the talks, around the future trading arrangement) we’re expecting to see NZD/GBP trend lower from here, below 0.50 next year.
In the US, the Fed will almost certainly hike the Fed Funds Target Range by 25 basis points to 1.25% - 1.50% on Thursday morning NZT. Unlike the last few years, the Fed will have delivered on its so-called ‘dot plot’ in 2017, hiking rates three times, consistent with what the median voter expected this time last year. The focus will again centre on the Fed’s economic and rate forecasts at this meeting. At its previous meeting, the median voter (‘dot’) expected an additional 3 hikes in 2018. If anything, we think the risks are tilted towards a few participants nudging up their rate forecasts for next year as FOMC members may bump up their forecasts for growth on the back of the recently agreed tax reform plan. A shift towards a 4 hike median for 2018 would be a surprise (it’s not our base case) and likely see further flattening in the US yield curve.
Locally, we will await the new government’s spending plans when they are included in the official figures for the first time at the HYEFU. Finance Minister Robertson’s speech yesterday morning didn’t provide any further clues and we will need to wait for Thursday for the details. We expect to see the DMO’s bond programme increased over the next few years but in the context of a government that is in very good fiscal shape relative to most other countries in the world.
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