The markets’ outlook for RBNZ monetary policy has been steadily deteriorating, with a Credit Suisse gauge of priced-in rate hike expectations for the next 12 months drifting steadily lower for the past five weeks for a cumulative loss of 31 basis points. Last week’s rate decision did not help the situation, as central bank Governor Alan Bollard said that “higher bank funding costs have reduced the level of stimulus that would normally be associated with any given level of the [benchmark interest rate],” adding that such conditions are expected to persist, thereby “reducing the extent of future increases in [borrowing costs].” Still, Bollard stood by the timetable calling for the beginning of rate hikes “around the middle of 2010”, thereby avoiding a total capitulation into dovish territory.
Meanwhile, the New Zealand currency’s link to risk sentiment has notably weakened, with the percent-change correlation between its trade-weighted average value and the MSCI World Stock index dropping to 0.63 from a reading of 0.84 less than two weeks ago. An anemic economic calendar is also unlikely to offer much help in terms of catalyzing directional momentum, with virtually nothing with particular market-moving potential set to cross the wires in the week ahead. This has coincided with decline to an 18-month low on Deutsche Bank’s currency volatility index, hinting at continued choppy trading from here. Only a decisive directional break in risk appetite seems likely to spur traders out of complacency, but the impetus for such an outcome would need to come from an external source at present.
