RBNZ Leaves Key Rate Unchanged, but NZD Moves Higher on Outlook

2013-07-24 21:50:00 Gregory Marks, John Kicklighter

THE TAKEAWAY: RBNZ leaves benchmark unchanged, but maintains hawkish outlook > forecast for January hike jumps > NZD/USD Higher

The Reserve Bank of New Zealand left its key benchmark interest rate unchanged at 2.50% and stated that it expects to keep that rate unchanged throughout 2013. Despite the restraint, hawkish remarks were made by the RBNZ statement such as notes of a strengthening economy, stronger consumer spending and even rapid home price inflation in parts of the country – projecting risks to price stability. The economy looks to be picking up steam according to central bankers, and that suggests the RBNZ expects it will have to eventually respond by lifting lending rates – a bullish outcome for the New Zealand dollar.

This preserved hawkishness despite a hold now overrides other concerns noted by the policy authority. Previously, the central bank’s lament that the NZD strength was a major headwind has hammered the local currency lower. However, at this point, it has become common place. Furthermore, concerns about global issues don’t seem to dampen expectations domestically. Governor Wheeler noted that there have been signs of slower growth in China and Australia, and he was concerned that the eventual exit to QE from other policy groups could cause problems. For the market though, the balance of power was clear as the expectation of a 25bp rate hike come January (after his 2013 hold time frame) rose from 17% to 50%.

NZD/USD (5-Minute Chart)

RBNZ_Leaves_Key_Rate_Unchanged_but_NZD_Moves_Higher_on_Outlook_body_Picture_2.png, RBNZ Leaves Key Rate Unchanged, but NZD Moves Higher on Outlook

Source: FXCM Marketscope

Following the announcement, the NZD saw a jump in excess of 0.50% as spreads widened and traders sold Wednesday’s dollar strength heading into the Asian session. Although the RBNZ has stated it does not look to change key rates for the remainder of 2013, the central bank may find difficulty in controlling home price inflation as cash flows to more secure assets in the region under a slowing China and Australia. It is important to note that although New Zealand is impacted by a slowdown in China, the currency does not depreciate to the extent that the Australian Dollar does under a weaker China. If the current trend continues, the NZD would look to benefit against the AUD.

AUD/NZD (1-Day Chart)