(08 MAY 2019)DAILY MARKET BRIEF 1:NZD plummets after RBNZ became the first central bank to resume easing

Following the Reserve Bank of New Zealand’s decision to cut the Official Cash Rate to record low 1.50%, the Kiwi tumbled to a fresh multi-month low during the Asian session with NZD/USD hitting 0.6527, down 1.18% on the day. However, the Kiwi quickly trimmed its daily losses as the currency pair climbed back to 0.6592 during the European morning. Improvement in the overall risk sentiment - i.e. the recovery in equities - also helped the Kiwi to climb higher.

The RBNZ’s decision wasn’t really a surprise as most economist anticipated such a dovish move. The unexpected weakness in inflation and the disappointing job report in the first quarter gave the RBNZ no option but to ease monetary policy. The consumer price index slid to 1.5%y/y in the March quarter, while economists expected an increase of 1.7%. Even though the unemployment rate dropped to 4.2% in 1Q, the employment change contracted 0.2%q/q, which shows that this level was reached only because of a reduction of the participation rate (from 70.9% to 70.4%).

The RBNZ, together with the RBA, are amongst the few central banks that have still some room to manoeuvre in term of monetary policy. In addition, unlike the Federal Reserve, they haven’t started to tighten monetary policy, which makes it easier to resume easing. The RBNZ would likely remain data dependant in the coming months with the probability skewed toward another cut.