NZ: Kiwi Flying High in the Aftermath of RBNZ - MUFG
Lee Hardman, Currency Analyst at MUFG, suggests that the New Zealand dollar has benefitted from the RBNZ’s decision to leave its key policy rate unchanged overnight at 2.25%.
“According to Bloomberg’s survey, seven out of seventeen economists had expected the RBNZ to ease policy today. It has prompted the New Zealand dollar to strengthen sharply after key technical resistance for the NZD/USD rate was taken out at just over the 0.7050-level where the recent highs from April and May were located, and reaching its highest level since the middle of last year. Despite the New Zealand dollar’s recent sharp gains it still appears broadly in line with our short valuation model estimate, i.e. it is not signalling that current strength is overshooting in the near-term.
The accompanying monetary policy statement highlighted that the RBNZ judged that the costs of lowering rates further at today’s meeting outweighed potential benefits. “In the Bank’s judgement, more monetary stimulus than projected, to return inflation to target a little sooner, would generate more volatility in non-tradables inflation and output than is necessary”. The RBNZ is concerned as well that lower rates could reinforce house price inflation highlighting that “the PTA directs the Bank to also have regard to financial stability”. Overall it leaves the impression that the RBNZ is more reluctant to lower rates further than in their current projections which have one more cut pencilled in and still some risk of second cut as well.
However, the sharp strengthening of the kiwi stands in contrast to the RBNZ’s projections that it will weaken modestly. If kiwi strength persists it will dampen the outlook for inflation which could prompt the RBNZ to lower their inflation forecasts which would justify further rate cuts. Yet the RBNZ’s next policy meeting is not until the 8th August posing little downside risk for the kiwi in the near-term.”