Talking Points:

  • The RBNZ held its benchmark rate unchanged at 1.75%
  • Official forecasts project headline inflation well anchored at 2% over the medium term
  • Following the update the Kiwi dropped broadly as the Fed prepares to overtake the RBNZ

See how retail traders are positioning in the NZD/USD intraday using the DailyFX speculative positioning data on the sentiment page.

New Zealand Dollar Drops on a Steadfast RBNZ

The Reserve Bank of New Zealand (RBNZ) held its benchmark rate unchanged at 1.75% once again. This decision surprised very few as overnight swaps show that speculators had assigned an exceptionally low probability to any other outcome from this particular meeting. On that outcome alone, we would suspect that the event would be a non-mover. However, there are other elements to the event that better apply to speculative interest. And in the central bank’s assessment of the economy, currency and even its forecasts for rates; we find disappointment enough to send NZD/USD dropping nearly 50 pips in the minutes following the release.

Forecasts Offer Little Enthusiasm

In the policy statement and data supplement that went out alongside the rate decision, it was clear that the RBNZ is still firmly set on a dovish course. In its assessment of economic conditions, the group reported activity eased over the second half of 2017 but that their outlook was for a period of strengthening due to loose monetary policy, high terms of trade, population growth and government spending. On inflation, the central bank noted the 1.6 percent weaker-than-anticipated CPI update. The coming quarter’s price pressures are seen dropping even more sharply, but they suggested that “longer-term expectations are well anchored at 2 percent”.

NZD/USD Drops After RBNZ Holds Rates with Tepid Inflation Outlook

Data from RBNZ

Looking into their data supplement, the RBNZ would also offer up its OCR (overnight cash rate) forecasts. The first uptick in their forecast (to 1.9 percent) isn’t registered until 2Q 2019. It doesn’t hit 2.0 percent until 1Q 2020. That is an unfavorable pace in a world where the Federal Reserve is moving at a projected three hikes per year pace.

NZD/USD Drops After RBNZ Holds Rates with Tepid Inflation Outlook

Data from RBNZ

RBNZ’s View on NZD/USD and Competition

In its own policy statement, the RBNZ noted the Kiwi had firmed over the period since the November statement, but attributed that appreciation to the weakness of the US currency. It anticipates a retreat on a trade-weighted basis moving forward.

That may very well be the case, and similarly not due to circumstances for the New Zealand currency alone. If the RBNZ holds its benchmark rate steady through the year as is anticipated by the central bank (though the market saw a nearly 70 percent chance of a hike before 2018 closes according to swaps), the US-based Federal Reserve will overtake the traditional carry currency’s yield. That will significantly change the dynamic of this currency’s position in the global spectrum.

Why is the Kiwi considered a ‘major’ when its liquidity is merely a fraction of the turnover done in peers like the Dollar, Euro or Yen? It is in large part due to the combination of its high sovereign credit rating and the high yield. Yet, as the yield holds at its own series’ record low as more liquid counterparts look to overtake it, there is less reason to circulate investment capital into New Zealand for a discounted return.

In the minutes following the RBNZ decision, the NZD/USD dropped over 50 pips down towards 0.7210.

NZD/USD Drops After RBNZ Holds Rates with Tepid Inflation Outlook

Chart created using TradingView

On a daily chart, the progress looks more productive for technical traders. With the extention the RBNZ rate decision offers, there is a more definitive looking turn for NZD/USD. After two months of climb within a broader range (and following a clear inverse head-and-shoulders pattern reversal back in early December), we seem to be taking another change in tack that fits a wider congestion.

NZD/USD Drops After RBNZ Holds Rates with Tepid Inflation Outlook

Chart created using TradingView

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