The RBNZ surprised both our expectations and the market by holding rates unchanged in November, but must now navigate the risks of coronavirus to New Zealand’s small open economy, whose largest trade partner is China.
Developments in domestic data have been mostly positive since December, with the labour market beating expectations, business sentiment improving, and lagged Q3 output data suggesting overall resilience.
However, the risks of coronavirus raise the likelihood of a rate cut this year, a prospect that may not yet fully be priced in by markets.
- Q4 labour market data, released last week, showed that overall jobs growth had slowed during the quarter, but wage growth remained strong. Total employment changed 0.0% on the quarter while labour force participation fell, resulting in a fall in unemployment to 4%. Private sector hourly earnings rose 0.1% on the quarter, leaving the index up 3% year on year.
- Business confidence surveys have shown an improvement since November. The NZIER business confidence index rose to -21 from -40 in January, while the ANZ business confidence index rose to -13.2 from -26.4 in December. The ANZ index figure was a two year high. Both of these surveys were based on responses prior to the extent of the coronavirus becoming clear, and as such are likely to be discounted by policymakers.
- Q3 GDP grew 2.4% year on year according to December’s release, but should be viewed in the context of the extreme lag of the data and the significant developments in US-China trade and Coronavirus seen since then.
Chart 1: NZDUSD
Chart 2: Implied Probability of a rate cure by March, according to OIS markets
Author: Simon Harvey, FX Market Analyst at Monex Canada.