Markets have already priced 25bp RBNZ rate cut expectations but NZD remains elevated relative to its recent history. Given central bank’s explicit need for a weaker NZD, should you expect more from the RBNZ and what would the effect on NZD be?
10 August, AtoZForex – There might be some resistance from major global central banks to cut interest rates into negative territory as focus shifts to fiscal policy, but monetary policy in the several central banks still has some way to go. The Reserve Bank of Australia (RBA) has cut interest rates last week to 1.50% and the Reserve Bank of New Zealand (RBNZ) is almost certain to cut interest rates by 25bp to 2.0% level this week.
RBNZ 25bp rate cut is certain
Bank of America Merrill Lynch sees scope for an extended RBNZ easing cycle over coming months amid NZD strength relative to RBNZ forecasts. The central bank has been explicit about the need for a weaker NZD.
Unfortunately, the 25db RBNZ rate cut has been already priced in and the Bank will need to act more aggressively to expect some relatively large adjustments in the market and its forecasts.
RBNZ rate cut effect on NZD
Despite its devaluation following dovish RBNZ tone in July meeting, the NZD remains at an elevated level relative to its recent history. While a 25bp interest rate cut may not be sufficient to materially lower the NZD in light of strong carry-seeking flows, it seems necessary for the central bank to keep monetary policy conditions at a stable level.
“A sufficiently large cut to the RBNZ’s Bank Bill forecast could yet weaken the NZD further especially relative to the AUD, where it would contrast with a more stable outlook for the policy rate,” BoAML added.
To force the NZD significantly lower, the RBNZ would need to cut the interest rate by roughly 50bp. “In this scenario (a 25% chance we think), NZDUSD would fall by 1c and the 2yr swap rate by around 10bp,” Westpac noted.
An extremely dovish scenario statement along with RBNZ rate cut of 50bp would push NZDUSD by 2c lower, and 2yr swaps around 20bp lower. However, Westpac sees less than a 10% chance of such an outcome.
Moreover, BoAML believes a 50bp cut could signal panic even before the new planed housing measures have been put into place.
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