All Eyes on the New Zealand Dollar Ahead of the RBNZ Rate Meeting Decision

For those looking to trade their Pounds into New Zealand Dollars the imminent RBNZ rate meeting could well be an event to watch as it is tipped to spark volatility.

The main focus of global foreign exchange markets over coming hours will be the New Zealand Dollar as the Reserve Bank of New Zealand gathers to decide on whether or not to further cut the basic interest rate (OCR).

Markets are pretty uncertain of what Governor Wheeler and his team will do, which makes for potential volatility in the NZD.

Money markets are seen pricing in 27bp of cuts for this meeting and just under 50bp by November.

Most institutional analysts expect the August meeting to result in the RBNZ cutting interest rates by 0.25%, from the 2.25% currently to 2.00%.

Some are even saying the Bank may cut rates by 50bps on Thursday.

The assumptions are based on the observation that inflation continues to remain tepid at best and the value of the NZD has reached expensive levels that could hamper New Zealand prosperity going forward.

"The strong currency is making it incredibly difficult to reach their inflation target and the central bank made it very clear that additional action needs to be taken to stop inflation from falling," says Kathy Lien at BK Asset Management.

The RBNZ might have cut rates earlier but they were concerned about the impact it would have on the housing market.

House prices have been booming in New Zealand over recent years leading to a ‘house price bubble’ according to many analysts, which has become a concern for policymakers.

The RBNZ could not cut interest rates before because that would have made mortgage lending even cheaper thus exacerbating the already too hot housing market even further.

By introducing what are called new macro-prudential rules, however, which made mortgage lending more difficult by increasing the minimum deposit required for purchasing a property for investment purposes, the central bank managed to give themselves the ‘breathing space’ to make a rate cut without adversely raising house prices.

Latest Pound / New Zealand Dollar Exchange Rates

	Live: 2.3113▼ -0.06% 12 Month Best: 2.3553
*Your Bank's Retail Rate	2.2327 - 2.242
**Independent Specialist	2.279 - 2.2882 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

The level at which they set interest rates becomes the level on which commercial banks base their interest rates, and on which general lending rates are based, so if the central bank cuts rates then usually so do other lenders.

The setting of interest rates has a major impact on the currency because lower rates tend to attract less capital inflows from foreign investors, who prefer to invest their money in countries offering higher rates of return.

Lower rates tend to lessen the inflows of capital and therefore demand for the kiwi falls, weakening it.

Watch for Guidance on Future Action

Lien, says that given a rate cut is now seen as inevitable, the devil may be in the wording of the accompanying statement, which is especially dovish will send the New Zealand dollar lower, but if neutral may actually see NZD rise:

“Like the BoE and RBA, the RBNZ is expected to cut interest rates by 25bp and if New Zealand also adopts a neutral stance, NZD will rise because 2% is still one of the most generous yields out there. However if they buck the trend and continue to maintain a strongly worded dovish stance, the currency could sink below 71 cents versus the U.S. dollar.”

CIBC Market’s Jeremy Stretch agrees with Lien, seeing the 0.25% cut (from 2.25% to 2.00%) as now fully priced in to the kiwi, however, he thinks the potential for volatility now comes from expectations of whether the RBNZ will cut again in November or not, currently a 50/50 possibility.

This too will be based on the wording of the statement:

“While a rate move from the RBNZ next week is now fully priced it’s the prospects for additional stimulus in November that matters, at this juncture the market continues to price in a near 50:50 chance of another cut prior to year-end.

"We would expect that investors will increasingly look for additional stimulus as recent NZD gains are set to constrain inflationary pressures. Look for the RBNZ to maintain dovish tendencies, opening up a test of recent double-bottom lows at around 0.6950/60 in upcoming sessions.”

Kiwi May Remain Strong Even if RBNZ Strikes Dovish Tone

Even if the accompanying statement does potentially point to more rate cuts in the future and the kiwi weakens as a result, downside may be limited. 

The problem for the RBNZ is that New Zealand will still command the highest interest rates in the G10 for the foreseeable future; this should ensure a steady flow of demand for NZD assets, with foreign investors still drawn to that elusive combination of stability and yield.

This could well see the New Zealand Dollar retain a positive bias, even if the initial reaction a RBNZ rate cut is weakness.