NZD risk coming up overnight; at 0300BST/2200EDT, we have the latest RBNZ rate decision. Over the past few months, the RBNZ have used rate decision primarily as a tool to weaken NZD, thus this could be their next opportunity.
Indeed, the kiwi (NZD) is only just off its highs for the year vs USD (annual highs were set just last Friday of just below the 0.6800 mark), despite all the RBNZ dovishness.
For context, the RBNZ had over the last few months identified a strong NZD as a key threat to the country’s economic recovery and has thus taken extensive action to “jawbone” it lower (i.e. threaten dovish policies in order to weaken the currency).
Unlike the RBA, over the last few months, the RBNZ have not cared about whether or not the NZD exchange rate reflects actual fundamentals (such as the way New Zealand contained the virus well and thus had a “less bad” recession that other developed nations in Q2).
More than just jawboning, the RBNZ shocked markets at its last meeting by increasing the size of its QE package to NZD 100bln from NZD 60bln.
Given the delivery of a large easing package just last month, most analysts thus expect that the RBNZ will not make any changes to policy. Interest rates are therefore expected to remain at 0.25%, with current guidance from the RBNZ stating that interest rates will remain where they are until at least March 2021. Thereafter, the bank will “reassess” the situation, i.e. be prepared to axe rates below zero.
Indeed negative rates are one of the key threats the RBNZ has been wielding in order to dampen NZD. Others include the threat of more QE (which was acted on last month) and even the threat of direct FX intervention.
Expect these dovish threats to be wielded again. However, there are signs that jawboning on NZD might be less this time around.
Only on the 2nd of September we had comments from RBNZ Governor Orr saying he is not concerned by the NZD exchange rate, quite a turn around from the bank’s stance of the past few months.
NZD has fallen between 0.5-0.8% in wake of each of the last three RBNZ meetings. If the RBNZ softens its stance on its dislike of NZD strength, then we could be in to snap this run.
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