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New Zealand Dollar Rallies as RBNZ Disappoints Rate Cut Bets

New Zealand Dollar Rallies as RBNZ Disappoints Rate Cut Bets

Daniel Dubrovsky, Analyst

Talking Points

  • New Zealand Dollar rallies against its major peers after RBNZ rate decision
  • The central bank left rates at 2.25 percent and did not signal near-term easing
  • Bond yield reaction likely shows that the markets were expecting further cuts soon

Keep an eye on short-term trends for the New Zealand Dollar using the Grid Sight Index (GSI) here.

The New Zealand Dollar rallied against its major counterparts after the Reserve Bank of New Zealand left rates unchanged at 2.25 percent. Heading into the announcement, overnight index swaps were pricing in a 24 percent probability of a cut. However, the markets are expecting at least one 25 basis points (bps) reduction in the RBNZ’s main lending rate over the next 12 months.

After a surprise rate cut in March, the Reserve Bank of New Zealand said that further easing may be required in its April monetary policy announcement. This was to ensure that future average inflation would settle near the middle of its 2 – 3 percent target range. The markets were looking for clues today if the central bank would reduce rates in the not so distant future.

According to the RBNZ, they maintained the familiar status quo signaling that further easing “may be required” and that policy will continue to be accommodative. There were also upgrades to the CPI outlook. The central bank now sees inflation reaching 2 percent in the fourth quarter (4Q) of 2017 instead of the first quarter (1Q) of 2018 previously forecasted. The reserve bank also upgraded its 4Q 2016 annual inflation forecast to 1.3 percent from 1.1 percent.

As the Kiwi rallied across the board, New Zealand 2-year government bond yields followed suit. This may reflect that the markets expect an RBNZ rate cut happening later rather than sooner. With that in mind, the central bank said that they will continue to monitor incoming economic data flow.

Meanwhile, the DailyFX Speculative Sentiment Index (SSI) is showing a reading of -1.6 following the announcement, meaning that for every trader long the NZD/USD, there are 1.6 on the short side. The SSI is a contrarian indicator at extreme levels, implying further NZD/USD strength ahead.

Want to learn more about the DailyFX SSI indicator? Click here to watch a tutorial.

New Zealand Dollar Rallies as RBNZ Disappoints Rate Cut BetsNew Zealand Dollar Rallies as RBNZ Disappoints Rate Cut Bets

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