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RBNZ Meeting: Jawboning a Key Risk to New Zealand Dollar

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The Reserve Bank of New Zealand (RBNZ) meets on Wednesday at 22.00 UK time to decide whether to change the country's base lending rate from the current 1.75% level - an historic low for the country.

No changes to interest rates are likely, but markets will be listening closely to the tone of Governor Wheeler and his team.

"We see some macro evidence to support a slightly more hawkish tone, but softer 2Q inflation and concerns over fuelling a strong NZD will likely see the RBNZ stick with a 'wait-and-see' policy stance. While NZ rates have been ticking lower in anticipation of a more neutral tone, there is a tail risk that the kiwi could come under additional pressure from ramped up RBNZ jawboning," says Petr Krpata, an analyst with ING Bank.

Current expectations are for the RBNZ to leave rates unchanged until at least mid-2018 with the RBNZ maintaining a tone that it intends to keep rates "lower for longer".

There has been some discussion of a possible rate hike recently, mainly as a result of feeling that the RBNZ might follow 'the herd' of other G10 central banks moving in that direction, but after analysing the data in more depth it seems highly unlikely.

Indeed, BNZ Bank's Doug Steel thinks if anything, the next move on NZD could be lower.

He cites declining inflation data, a cooling housing market, weak labour market data and the negative headwind from the still relatively overpriced Kiwi as the major reasons for maintaining an idiosyncraticaly dovish opinion.

Whilst there are positives: "Fonterra has lifted its milk price forecast on the back of solid offshore prices," these do not outweigh the negatives.

Forexlive's Nick Bovell sees data as mixed:

"Since May, consumer and business sentiment remain strong, activity data have been solid if not strong, while price-related data have disappointed," he summarises.

Then commenting on recent labour market data he says:

"Today's Jun qtr labour market report saw the unemployment rate slip to an eight-year low of 4.8%, but only via the participation rate slump masking an unexpected slide in employment."

Dairy products comprise the country's largest export product and they came out positively:

"Dairy prices underwhelmed again overnight and let's not forget that Q2 CPI was flat, against RBNZ expectations of +0.3%/qtr."

His conclusion is that the mixed data reinforces to an even greater degree the RBNZ's existing strategy:

"The soft and hard data updates support RBNZ Governor Wheeler maintaining his long-held neutral stance, allowing him to repeat next week that the OCR was going to remain at 1.75% for a very (very) long time."

The impact on NZD of the Reserve Bank maintaining an unchanged stance is likely to be negative, according to BNZ.

The already overstretched Kiwi pulled back sharply last week and a neutral RBNZ statement will propbably exacerbate the sell-off.

"We see the bias for the week ahead remaining to the downside for the NZD. Thursday’s Monetary Policy Statement shouldn’t offer much support for the NZD. The underlying message will be that the RBNZ is in no hurry to join some other major central banks in looking to remove policy accommodation," says BNZ's Jason Wong.

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Our own technical forecast for GBP/NZD, however, is showing the opposite - that there is a possibility of the Kiwi strengthening over period encompased by the RBNZ meeting.


The look and feel of the daily chart makes us think that the 1.7926 high is highly unlikely to be broken, which means the pair will probably trend lower.

Broadly the pair is in a sideways range within a larger downtrend so the overall 'flow of the current' is also down.

The 4hr chart shows the pair gapped up recently after correcting back in a three-wave abc correction.

The gap is a bullish sign, although because it occurred within a broadelty sideways market it will probably fill, suggesting downside.

A break below the 1.7570 lows would probably lead to a continuation of the mini-bear trend lower to a target at 1.7400.

Although we think it is less likely, a move above the 1.7921 highs would probably extend up to a target at 1.8000.


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