Talking Points:

  • The Reserve Bank of New Zealand keeps interest rate at 2.50 percent, sees overvalued Kiwi
  • RBNZ expects to maintain rate through year end with rise in 2014 as heated housing market adds inflationary pressures
  • Governor Wheeler looking towards US Dollar price action to devalue the Kiwi

The Kiwi strengthened against the US Dollar as the Reserve Bank of New Zealand kept its benchmark interest rate unchanged at 2.50 percent. Although the central bank finds the New Zealand dollar overvalued, it expects to maintain this rate through the end of the year and says it will likely rise in 2014. The RBNZ’s reluctance in lowering rate likely comes from price stability concerns over the country’s high commodity export prices and heated housing market. Instead, Governor Graeme Wheeler is hoping to see a rise in the US Dollar to help relieve bullish pressures on the Kiwi.

Price action for the US Dollar will likely come from investors weighing their monetary policy expectations on US developments. The main event risk will be the FOMC rate decision on September 18 where the committee is widely expected to announce a reduction in the Fed’s monthly asset purchases. But more importantly, rhetoric from the meeting could deteriorate risk sentiment and compel investors to unwind carry trade such as NZD/USD and move the pair lower.

NZD/USD (5-Minute Chart)

RBNZ_To_Maintain_Rate_Through_Year_End_Signals_2014_Rise_body_Picture_1.png, RBNZ To Maintain Rate Through Year End, Signals 2014 Rise

Source: FXCM Marketscope

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Jimmy Yang, DailyFX Research Team