NZD Outlook: TD Securities Sees Soft Labor Market, RBNZ Hike Still on the Table

TD Securities analysts said the New Zealand labor market remains soft, but the Reserve Bank of New Zealand (RBNZ) is still expected to deliver an interest rate hike, according to a note released this week.

What the Data Shows

Recent employment indicators for New Zealand have pointed to easing labor market conditions. TD Securities highlighted that the softening is most visible in job vacancy data and subdued wage growth, which could weigh on domestic demand.

However, the investment bank argues that the RBNZ is likely to look through the short-term weakness, as inflation remains above the central bank’s target range. The bank’s own projections, as of the last policy meeting, showed a gradual return to the 1-3% target only by late 2025.

RBNZ Policy Expectations

The RBNZ has maintained a restrictive stance, and markets are pricing in a peak cash rate of around 5.5% by mid-2024. TD Securities expects the central bank to hike by 25 basis points at its next meeting, citing persistent domestic inflation pressures.

The bank’s economists noted that while the labor market is cooling, it is not yet weak enough to deter the RBNZ from further tightening. They also pointed to the recent rebound in dairy prices and improving terms of trade as supporting the case for a hike.

Impact on the New Zealand Dollar

The NZD has been sensitive to shifts in RBNZ expectations. A hawkish hold or a hike would likely provide near-term support for the currency, while a dovish surprise could trigger a sell-off. As of this week, the NZD/USD is trading around 0.6150, near its recent range.

For traders, the key risk is the RBNZ’s forward guidance. If the bank signals that this is the final hike, the NZD could struggle to sustain gains. Conversely, if it leaves the door open for more, the currency may strengthen further.

Conclusion

In summary, TD Securities sees the soft labor market as a concern but not a barrier to another RBNZ rate hike. The central bank’s focus on inflation, combined with resilient terms of trade, suggests a hike is still likely. The NZD’s near-term direction will hinge on the RBNZ’s communication and the incoming data.

FAQs

Q1: Why is the RBNZ expected to hike despite a soft labor market?
The RBNZ is prioritizing inflation control. Although the labor market is cooling, inflation remains above the target range, and the central bank may look through short-term weakness to anchor expectations.

Q2: What does a rate hike mean for the New Zealand Dollar?
A rate hike typically supports the currency by attracting foreign capital. However, if the RBNZ signals an end to the tightening cycle, the positive impact may be limited.

Q3: What are the risks to this outlook?
The main risks include a sharper-than-expected labor market deterioration, a significant drop in inflation, or a global economic slowdown that could prompt the RBNZ to pause earlier than anticipated.