FX comment – NZD slides on RBNZ dovish tone on exchange rate and rate cut speculation

by: Roy Teo

  • RBNZ maintains wait and see approach
  • NZD levels remains unjustified

RBNZ maintains wait and see approach

As expected, the Reserve Bank of New Zealand (RBNZ) left the official cash rate unchanged at 3.5%. The RBNZ noted that growth in China, Japan and the euro area has eased while that of the US was robust. The lower oil price was deemed to have a significant impact on the economy. Households’ purchasing power will increase and the cost of doing business will be lower. However fiscal consolidation, reduced dairy payout, risk of drought and strong exchange rate will weigh on growth. Headline annual inflation is expected to be below 1% through 2015 before moving back towards 2% more gradually than previously anticipated. On balance the RBNZ decided that they will keep the OCR on hold for some time with adjustments depending on flow of economic data. We maintain our view that the RBNZ will keep the OCR unchanged at 3.5% this year. The weak 2014 Q4 inflation print was mainly due to declining fruit and vegetable prices and tradable inflation. The domestic economy remains strong in our view and non tradable inflation remains above 2%. Nevertheless, we do not rule out a rate cut this year should commodity prices remain low and longer than currently envisaged.

NZD levels remains unjustified

The RBNZ reiterated their discomfort on the strong exchange rate despite its recent decline. “We believe the exchange rate remains unjustified in terms of current economic conditions and expect to see a further significant depreciation.” The New Zealand dollar (NZD) was sold off aggressively from 0.7450 to below 0.7320 due to the RBNZ tone on the exchange rate and market speculation that the OCR could be lowered in the coming months. As a result, the NZD/USD could test our year end target of 0.71 sooner than envisaged.