Goldman Sachs: RBNZ Joins The Hawk Flock

Goldman Sachs note that "the RBNZ surprised on the hawkish side last week; the MPS reflected more confidence in the growth outlook, and the bank's path for the OCR projected a full 25bp hike by 3Q22, with a steady pace of increases thereafter (our economists also revised their forecast for liftoff to Q1 2023). While Governor Orr cautioned that the actual path for the OCR will be conditional on how the economy actually evolves, the market reaction reflected a clearly hawkish interpretation of the projections. Kiwi forwards repriced the most in the 2- to 4-Year part of the curve as yields priced in both an earlier start and a faster pace of policy tightening, with the market now fully discounting a hike by June 2022 (when the bank's large scale asset program is currently set to end). Looking ahead, we think NZD rates will internalize any further positive economic surprises by pricing a steeper path rather earlier start to rate hikes, though if markets perceive a risk that the bank stops asset purchases early, markets could further pull forward the timing of the first hike. The latter could happen on positive surprises on labor market slack and inflation dimensions, though the currency channel may be worth monitoring should more hawkish policy expectations translate to material currency strength. On the back of the hawkish RBNZ pivot, we have nudged up our 12-month NZD/USD forecast to $0.77 (from $0.76); we have also lowered slightly our 12-month forecast for AUD/USD to $0.80 (from $0.81); these changes take our implied AUD/NZD forecast to NZ$1.04."