Key Comments:

-Wheeler expects a rate increase ‘soon’

-Sees the need to return rates to more normal levels

-Inflation pressures are likely to rise over the next two years

-Fiscal consolidation to partly offset demand strength

-Doesn’t see the current NZD rate as sustainable in the long run

-GDP growth to be around 3.5% in the coming year

The Reserve Bank of New Zealand kept rates on hold once more today at the January meeting as market participants largely expected. Comments from Gov. Wheeler did not deviate from prior statements as he continues to hint at hikes in the key benchmark interest rate moving forward.

Inflation data out of New Zealand continues to be key in determining whether rates will rise and although Gov. Wheeler has stated multiple times that he sees the RBNZ as doing so ‘soon,’ he remains wary over the current New Zealand Dollar exchange rate.

As worries of a credit crisis in China continue to loom ominously, it may be no surprise that Gov. Wheeler is waiting for more clarity about growth in the East before he starts a rate hike cycle. After all, if we do continue to see a flight to safety from those currencies fueled by the carry trade, Wheeler may prefer to raise rates with a lower New Zealand Dollar in place. Of course if we do see inflation data continue to press to the upside- especially in the context of higher fuel costs due to weakened NZD- then we may very well see price levels force the RBNZ to act sooner rather than later.

January 29, 2014: NZD/USD (5-Minute Chart)

NZD_Selling_Resumes_Following_Fed_RBNZ_Rate_Decision_body_Picture_1.png, NZD Selling Resumes Following Fed, RBNZ Rate Decision

Source: FXCM Marketscope

Price action was initially muted at the release, but soon thereafter selling pressure resumed on the back of USD strength. Thirty minutes after the release we are currently seeing the NZD/USD pair press lows not seen since the start of the year. Note that we have event risk for the Kiwi tomorrow at 21:45GMT with trade balance data being released.

Gregory Marks, DailyFX Research Team

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