fxmatters

This week the focus shifts to the RBNZ. Add the likelihood that the RBNZ will repeat its call for a mid 2010 tightening to the global share market rally and the RBA rate hike of last week and the scene is set for the NZD/USD to rally this week.

In broad terms the economy is evolving as the RBNZ outlined in the December Monetary Policy Statement, albeit with the upside growth risks now less. There is much to be uncertain about at present including near-term global growth prospects, the impact of local liquidity requirements for banks that come into force 1 April and the policy measures to be unveiled in the 20-May Budget. Nonetheless the local growth rate is now higher and, significantly, the Australian economy is strengthening.

Meanwhile the cash rate is at unsustainably low levels. The appropriate policy path is to continue warning of imminent cash rate hikes but allow scope for reaction to the April/May policy intitaives; hence the likelihood that the RBNZ repeats the vague “begin removing policy stimulus around the middle of 2010″ line on Thursday.

Any NZ dollar reaction this week is unlikely to change the broader picture of a sideways trading NZD/USD with the probability of a revisit to 65c still high.