FX comment – NZD slides after RBNZ signals greater discomfort on strong exchange rate

by: Roy Teo

  • NZD slides after RBNZ dovish comments
  • RBNZ to keep OCR unchanged well into 2016

 

NZD slides after RBNZ dovish comments

The New Zealand dollar (NZD) gapped by almost one cent lower to below 0.76 early this morning after the RBNZ stated that the NZD is unjustifiably high and unsustainable. In addition the RBNZ implied that should the inflation outlook decline due to global forces and strong exchange rate, a rate cut will be warranted. The central bank reiterated that the appreciation of the NZD while key export prices have been falling is unwelcome. Furthermore, the RBNZ was more dovish on the growth outlook due to lingering effects of drought, fiscal consolidation, and the strong exchange rate. This was in contrast to previous monetary policy statement when the RBNZ mentioned that there are areas of uncertainty surrounding the outlook for capacity pressures due to the above mentioned factors.

RBNZ to keep OCR unchanged well into 2016

We remain optimistic that the RBNZ will keep the Official Cash Rate unchanged at 3.50% well into 2016. The domestic economy remains strong in our view. Nevertheless we acknowledge that should the NZD remain stronger than expected, a deterioration in growth and inflation outlook is likely to trigger a rate cut later this year. In addition, we do think that the RBNZ is likely to intervene and weaken the exchange rate more aggressively. We continue to expect a weaker NZD towards 0.68 by the end of this year.