RBNZ Hold Rate And Refrain From A Dovish Meeting

RBNZ held and refrained talking their currency down, seeing the Kiwi dollar spike higher across the board.  

Official Cash Rate unchanged at 1 percent

• Inflation remains below the 2 percent target mid-point but within our target range
• We expect economic growth to remain subdued over the remainder of the calendar year
• However, New Zealand’s export commodity prices have been robust
• New Zealand dollar exchange rate this year is also providing a useful additional offset to the weaker global economic environment
• Domestic economic activity is expected to increase during 2020
• Interest rates will need to remain at low levels for a prolonged period 
• Risks to the economy in the near term were tilted to the downside
• We will add further monetary stimulus if needed

Today’s hold caught markets and economists off guard. As of yesterday, 80% of economists polled expected a cut and markets were pricing in >85% chance of a cut, following a weak read on inflation expectations from RBNZ’s own survey. On that note, whilst markets focussed on inflation expectations of 1-2 years ahead, the minutes states that “long-term inflation expectations remain anchored at close to the 2 percent target mid-point” showing that, where CPI is concerned, they’re playing the long game.

Still, at -75bps over just 5 meetings, they could still be waiting for their actions to take effect on the economy. Furthermore, this means RBNZ have cut by -250bps since they last raised rates back in 2014 yet still have room to ease if they require.

However, the press conference was not dovish.  During his speech, Adrian Orr stated “we have the ability to observe the data, knowing we’re providing plenty of monetary stimulus” after providing a “significant cut in August”. He also added that QE is not a tool that is currently part of their bigger plan. So, unless data is to deteriorate notably from here, perhaps the low is in at 1%. By the end of the press conference, markets were pricing in just a

AUD/NZD: At the time of writing, it’s the most bearish session since September 2017. It’s daily range has also expanded over 200% of its 10-day ATR and is just above key support, so there is potential for mean-reversion over the near-term. Yet, given its failure to break above 1.084 and the potential that RBNZ are to hold rates at 1% from here, AUD/NZD could be overbought and poised to eventually break to new lows.

• Currently testing 1.0665 support, bears could look to fade into minor rallies below 1.8000. Yet given strength of today’s bearish candle we wouldn’t expect a rally to test 1.8000 even, with lack of dovish comments from RBNZ’s press conference.
• There’s a cluster of support around 1.0620 which bears would need to conquer, but a break beneath here brings 1.0453-1.0500 into focus.

Related analysis:
RBNZ Expected To Cut Rates, Yet Their Degree Of Dovishness Is Key | NZD/USD, NZD/CAD
Rising Unemployment Weighs on NZD | NZD/USD, NZD/JPY, AUD/JPY