By Chris Tedder, Research Analyst, Forex.com

The Reserve Bank of New Zealand’s monetary policy meeting this week will be closely watched for any indication the bank may start tightening monetary policy sooner than expected. We don’t anticipate the bank will alter policy for a while, but last time around RBNZ Governor Wheeler was somewhat hawkish, citing up-beat business confidence and construction activity indicators. The governor also noted that the rebuild in Canterbury is gathering momentum and the positive impacts should find their way into the real economy. However, the most hawkish development may be from rising house prices in NZ.

The concern is housing demand is getting too far ahead of supply, which may result in a more hawkish than expected meeting this week. Furthermore, since the bank last meet business confidence improved, the unemployment rate dropped, albeit largely due to a fall in labour force participation, and food prices and consumer confidence skyrocketed. On the other side of the monetary policy equation, NZ’s trade balance dropped into deficit territory, the terms of trade index dropped in Q4 for the sixth straight quarter and manufacturing activity was flat in February. On balance, we think the bank has reason to be more hawkish than the market is anticipating.

Therefore, there may be scope for kiwi strength post-meeting. However, we would avoid NZDUSD as it is showing some technical weakness and has been hit by USD strength lately.  Instead, AUDNZD may respond better to a more hawkish RBNZ, especially considering the RBA is still in an easing mindset. Technically, the pair is facing a lot of resistance around 1.2435 and there is evidence of a potential double-top (see chart below). On the downside, we are watching support zones around 1.2310 and 1.2250. A break there may see AUDNZD drift towards 1.2145.

Source: FOREX.com