RBNZ Governor Hawkesby stated that future meetings will be open for discussions, with the OCR expected to drop to around 2.5%. The rate of any further cuts will depend on new data, and no decisions have been finalized yet. Hawkesby noted a historic first with a 4–2 voting split at the bank. He also mentioned the plan to add a new MPC member by the October meeting. Despite these changes, the RBNZ’s view on the neutral rate remains steady, and the OCR is no longer considered restrictive.

Fiscal Outlook and Economic Activity

The fiscal outlook indicates a decrease in government spending, which will help control inflation. Economic activity in Q2 was weaker than expected. The RBNZ has noticed slower growth in house prices and believes that cautious behavior from both businesses and consumers could lead to additional policy measures. The previous easing measures, totaling 250 basis points, should help improve growth. The RBNZ is comfortable with the decline in the NZD. As the Reserve Bank of New Zealand plans for more rate cuts, the New Zealand dollar is likely to weaken. The bank has clearly stated it is okay with the NZD falling, which signals a good opportunity to take short positions. This dovish attitude stands in contrast to the RBA, which kept rates steady last month, making a short NZD/AUD position attractive. We should prepare for lower interest rates in the derivatives market, especially by receiving on one-year swaps or buying 90-day bank bill futures. Recent data shows that swap markets are now pricing in nearly an 80% chance of a 25 basis point cut by the October meeting, up from only 45% last week. The expected drop to around 2.5% from the current 3.75% OCR signals at least five more cuts over the next year.

Data Driven Strategy for Options Traders

The main point is that the easing pace will depend entirely on data, creating opportunities for options traders. The bank’s mention of weaker Q2 economic activity, confirmed last month with a 0.2% GDP contraction, means that the upcoming CPI and employment data will be crucial. We expect implied volatility to increase ahead of these releases, making it a good time to buy straddles. Historically, when the RBNZ starts an easing cycle during slowing growth, it tends to act decisively. For instance, in the 2015 easing cycle, rates were cut by 125 basis points in less than a year due to falling dairy prices and global growth. With business confidence at a nine-month low and slowdowns in China’s manufacturing output, the current data suggests the bank might act faster than expected. However, caution is needed. The bank’s comments about falling government spending aiding inflation could slow the pace of cuts if growth data improves unexpectedly. Still, the suggestion that cautious businesses and consumers may lead to more policy actions supports a dovish outlook. Therefore, we should view any strength in the NZD as a chance to sell in the coming weeks. Create your live VT Markets account and start trading now.

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