The New Zealand dollar tumbled more than 1.8% during the Asian session amid a bigger-than-expected rate cut from the Reserve Bank of New Zealand. The Kiwi fell as much as 180pips to 0.6378 against the greenback after the RBNZ trimmed the Official Cash Rate by 50bps to record low 1%, while market participants were expecting a cut of only 25bps. The currency pair broke the $0.6425 support (low from October 8, 2018) and is currently testing the key $0.64 support area implied by the 61.8% Fibonacci level (based on March 2009 - July 2011 rally). On the downside, the next supports lies at $0.6348 (low from January 20, 2016) and then $0.6237 (low from September 23, 2015). A break of those levels would open the road towards 0.6130 (low from August 2015).
The RBNZ has choose its side and it is going to be the dovish one. Adrian Orr not only over delivered by cutting 50bps but also open the door to negative interest, or even non-conventional policy, amid worsening economic outlook and subdued inflation pressures. The Australian dollar was also affected by the decision of its neighbour’s central bank as investors anticipate the RBA will follow the footsteps the RBNZ and cut further interest rates. Australian and New Zealand are some of the few countries that are not using negative rates. However, times are changing and the countries are starting to pay a price for their dependency to the Chinese economy. Indeed, 39% of Australia’s exports goes to China, this figure reaches 28% for New Zealand). We believe that both the Kiwi and the Aussie will continue to move lower.
By Arnaud Masset