RBNZ Day

Hold, dovish hike, or?

It’s a big day for the RBNZ as it’s a line ball call whether or not to hike rates. The market has it 70/30 yes, while the setup is similar to the one facing the Fed: Inflation is high but it’s about to drop precipitously due to falling oil prices. In contrast to the U.S., though, the economy in New Zealand remains weak and perhaps most important is that there has been almost no new economic information since the last RBNZ meeting. At that meeting, there was a 3-3 split with the external members all voting for a cut while the internal RBNZ voters (including the tiebreaker, Anna Breman) voting for a hold.

External MPC members
Carl Hansen, Hayley Gourley, Prasanna Gai voted hike.

Internal / RBNZ officials
Anna Breman, Governor / Chair, Karen Silk, Deputy Governor, Paul Conway, Chief Economist voted hold

The external voters (Gourley specifically) seemed concerned about imported inflation, rising fuel costs, and second-round effects. None of those concerns hold the same level of urgency today as they did at the May meeting. Into that vote, Brent Crude was trading $100/$110 and now it’s $72. Meanwhile, Paul Conway had stressed that higher mortgage rates and tighter financial conditions give the RBNZ breathing space. This chart from Bloomberg shows that nicely.

It’s a bit of a circular argument from Conway because one would presume that if the RBNZ does not ratify the higher yields priced in by the market, financial conditions will loosen, but with imported inflation and second round effects off the table, I think the most likely outcome tonight is either a hold or a very dovish hike.

Here’s a quick quote from the start of the May presser:

Members in favour of raising the OCR were more concerned with the risk of cost pressures leading to stronger second round effects on inflation. Members in favour of the hold also saw inflationary pressures but emphasised low core inflation, subdued wage growth, and well anchored medium and long-term inflation expectations. These members also put more weight on weak demand and tighter financial conditions as likely to dampen second round price increases.

My feeling is that the doves will win out tonight and that will be bearish NZD as the strip still has so much priced in and NZD beta to yields is meaningful, especially around RBNZ meetings. Here is how much NZD moved in the six hours post RBNZ meeting, 2020 to now.

That’s a 58bp absolute move, on average, and a median absolute move of 52bps. As I believe Asian currencies are lagging the reversal in oil and yields, I am going to buy a 2-day 92.00 NZDJPY put for around 30bps. This will give me a bit of JPY exposure if the RBNZ is dovish as I believe the organic rollover in USDJPY is going to continue/accelerate as USDKRW shows the way. It looks likely that my 161.50 USDJPY put will expire worthless today, though I am writing this at 8:34 a.m. so there is still some small shred of hope.

With regard to the yen, I think the market is too focused on the fiscal story and is ignoring the moves in yields and oil. Importer demand for USDJPY is going to be lower going forward. Trading balance of payments, fiscal risks, and structural factors of that sort works until it doesn’t—it is often cancelled out by shorter-term factors like commodity prices and yields. With the market all-in on the multi-year fiscal story, the shorter-term factors could scuttle the short JPY trade for a bit.

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Crypto

It is mildly interesting that Strategy sold more bitcoin and the price has held in well. Much as the purchases above 120k had no market impact and looked like off-market fills by the time they were announced, this time Saylor managed to sell on a 60k handle and announce the trade with BTC at 62k.

Buying high and selling low and diluting common shareholders isn’t a good thing for anyone, but the price action in BTC does show strength. This is the first time in ages I have seen green shoots in crypto as specs are even buying bombed out DATs like BMNR.

If you believe that PURR is the future (many do!), it’s trading pretty cheap to HYPE right now. As such, long PURR could be a nice way to trade the current resilience and bad news/good price in crypto markets. Stop below $7.50 and target $10.50 kind of thing. Not investment advice.

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Final Thoughts

1. Would you like a signed copy of Alpha Trader or Trade Outside the Box for yourself, or as a gift? My son is looking to make some extra cash before he heads off to school and so I told him to build a website where people can buy signed books and I’ll sell them to him at cost. You get a signed book for the normal retail price and he gets the margin. Good gift… I will personalize it however you like.

Please note shipping outside the U.S. is insanely expensive. We cannot control that. There are 10 Alpha Trader hardcovers plus many paperbacks. Now ’til August 20.

Here’s the site:    https://brent-donnelly-signed-books.myshopify.com

2. In case you missed it. A good piece from Citadel.
3. My plan/hope with the USDKRW is that I won’t touch it and it simply blasts through the bottom of the spread.
4. Semis up. Semis down. Leverage cuts both ways.

good luck ⇅ be nimble