THE TAKEAWAY: RBNZ holds rates at 2.50% > RBNZ wait-and-see approach contrasts with RBA’s dovish bias > Kiwi strengthens

NZ_Dollar_Rallies_as_RBNZ_Holds_Rates_body_Picture_5.png, NZ Dollar Rallies as RBNZ Holds Rates

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The Reserve Bank of New Zealand left its target for the benchmark cash-rate at 2.50%, in line with consensus estimates. In its statement, the central bank noted that the South Pacific nation’s economy was exhibiting signs of recovery, especially in the housing market, which appears to be rebounding from the Christchurch earthquake last year. In addition, the bank remarked that inflation pressures remain subdued. However, the RBNZ noted that global market conditions remain “fragile” and that the strong Kiwi remains a concern.

The New Zealand Dollar rallied following the release, strengthening over 40 pips from 0.8123 to 0.8166 against the Greenback, with markets continuing to draw a contrast between the “wait and see” stance of the RBNZ and the dovish bias of the RBA.

With inflation well within the RBNZ’s target of 2 percent plus or minus 1 percentage point, there is little scope for rate increases in the near future. In fact, Credit Suisse overnight index swaps continue to imply no change in rates in the next 12 months. Far more important in determining the Kiwi’s course will be the extent of an economic slowdown in China – the main destination for the country’s exports – and risk sentiment tied to the reemerging Eurozone debt crisis.