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The New Zealand dollar was the top performer among G10 currencies last night, and the latest policy meeting by the RBNZ is to thank for that. The NZD/USD exchange rate surged to an intra-day high of 0.6152, while the AUD/NZD rate fell to an intra-day low of 1.0861. The New Zealand dollar has appreciated 4.1% month-to-date versus the USD, making the Kiwi the best G10 currency this month.
First off, the source of strength in the Kiwi overnight has emanated from the RBNZ's hawkish policy update. The RBNZ's fresh projections now imply a higher probability of lift in the OCR, as the average OCR peak this year was revised to 5.65% from 5.60% c/f February. These suggest a 60% chance of another 25bps lift. Governor Orr had just said that a rate hike was a real consideration at this meeting, underscored by the Committee's limited tolerance for further inflation surprises. That's a hawkish pivot and would place fresh projections also suggest the policy rate is expected to remain at an elevated level through an extended period and not be reduced until late next year.
The Antipodean central banks rank among the most hawkish within the G10, in line with the RBA of late. Finally, the RBNZ has lifted its estimated long-run neutral policy rate by 25bps/2.75%, implying the current 5.50% rate would be very restrictive. That remains despite the sharp slowdown in the economy over the last year and easing labour market conditions, and it isn't expected to fall back inside the 1-3% target band until the fourth quarter of this year. They return to their 2.0% target by mid-2026. That's presuming the improvement in external market conditions continues, which the RBNZ acknowledges. More, the RBNZ says it expects strong inflation "for a prolonged period".
If it all plays out, then the RBNZ's hawkish update should support the kiwi into the short term: As a result, the Canadian rate market has seen increased pricing for a cut from the Bank of Canada (BoC). After this morning's release of the latest Canadian CPI report for April – which showed that core inflation surprised to the downside for the fourth consecutive month – the probability of a BoC rate cut at the June policy meeting rises to just over 50%. The average of the core CPI measures slowed to an annual rate of 2.8% in April from 3.1% in March, with the 6-month annualized rate slowing further down to 2.4%. Inflation is near the BoC's target, and with the economy growing below potential, there remains ample room for the BoC to reduce its policy rate. We still anticipate the first BoC rate cut at the June policy meeting. We think the pricing of divergent BoC and Federal Reserve policies should keep USD/CAD trading in the high 1.3000s over the coming months. And we continue to look for further outperformance of the AUD and NZD on the crosses.
GBP: Services Inflation Surprises Encourage BoE Caution
The pound jumped higher this morning in the wake of the latest UK CPI report for April. That lifted the GBP/USD rate above 1.2750 and saw EUR/GBP fall back toward the pivotal 0.8500 level. This past week, the pound enjoyed an improved tone from markets reducing expectations of BoE rate cuts. Markets now price in just under a 50:50 shot for the first BoE rate cut to happen in August and only around 38bp of cuts for the rest of the year. The recent positive impulse came after markets started to reduce the probability of BoE rate cuts.
The hawkish repricing of BoE rate cut expectations comes on the back of the last UK CPI print, which showed that underlying inflation pressures were more persistent than what was being priced by markets. Headline inflation fell sharply to 2.3%, dragged lower by energy prices, but core inflation only decelerated to 3.9%, services inflation to 5.9%, both of which are higher than anticipated. This suggests MPC members may continue to have some concerns brought about by the risk of persistent inflation in the UK. A stronger April CPI report should rule out an imminent BoE rate cut at the June meeting but casts doubt on comments suggesting a possible rate cut in August. With the BoE rate cut cycle now seeing a delayed start and UK yields remaining high, this should offer support for the pound at a more robust level over the medium term.
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