New Zealand’s central bank has cut its interest rate by 25db and released its August RBNZ statement. How dovish was it and was it enough to have an effect on the NZD?
11 August, AtoZForex – The Reserve Bank of New Zealand (RBNZ) cut the Official Cash Rate (OCR) for the second time this year by 25bp to 2.00%, in line with market expectations.
August RBNZ statement highlights
The RBNZ statement sounded unambiguously dovish, acknowledging that downside risks to inflation expectations were emerging from an expensive NZD.
“The prospects for global growth and commodity prices remain uncertain. Political risks are also heightened… The high exchange rate is adding further pressure to the export and import-competing sectors and, together with low global inflation, is causing negative inflation in the tradables sector,” August RBNZ statement read. “A decline in the exchange rate is needed,” it included.
Despite a good attempt by RBNZ President Graeme Wheeler to talk the NZD down, in the current environment where carry trades prevail, central banks with high yielding currencies need to over-deliver on market consensus to make an impact on their currency. In fact, this is what major banks argued ahead of today’s RBNZ rate cut.
RBNZ interest rate expectations
“Our current projections and assumptions indicate that further policy easing will be required,” August RBNZ statement read.
In delivering only 25bps cut to the OCR, which was more than 100% priced in ahead of the meeting, and the RBNZ’s latest 90-day bill track implying only one more interest rate cut, the NZD has bounced sharply against the dollar reaching 0.7330 area.
Given the dovish rhetoric in the August RBNZ statement, “we now expect another two 25bp rate cuts, which would take the OCR to 1.50%. We expect the next cut to be in November 2016, followed by another in Q2 2017,” Barclays projected.
Technical NZDUSD analysis
NZDUSD remains trending in the bullish direction and longer term target is now at Fibonacci 161.8% retracement level at 0.744.
Nonetheless, given the strong rebound from Fibonacci 138.2% retracement level at 0.733, some correction and technical fluctuation is inevitable.
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