As we wrote about last week, the decision to close the economy of New Zealand due to a suspected case of coronavirus within the community took a heavy toll on NZD. Against the US Dollar, the Kiwi did not find support at its recent lows reached earlier this month and set new record lows on the NZDUSD currency pair. The potential ramifications for the economic recovery in New Zealand were the reasons for the fall in the Kiwi Dollar but only one day on from the decision to shut down swathes of the economy, the central bank delivered yet further condemnation for the currency. Spurring a significant second consecutive day of losses for the NZDUSD pair, the decision to hold rates defied many expectations within the market for a hike in the central bank’s interest rate.
Alongside much of the G10 space, interest rates in New Zealand moving into the decision were at, and today remain, 0.25%. Due to the hawkish rhetoric coming from the RBNZ over the past few months as the economy has begun to bounce back from the Covid-19 pandemic, markets had held as their consensus forecast a rate hike of 0.25% from last Wednesday’s decision. The setback was significant across FX pairs, but of course in particular the New Zealand Dollar, as the anticipated rate hike would have been one of the first materialisations of a normalisation of monetary policy within a developed economy.
During the release, the Kiwi plummeted by 1% within just one minute following the release scheduled at 03:00 BST. However, over the next thirty minutes NZD reclaimed almost all of the ground lost on its crosses as markets digested the policy decision as a whole. The Reserve Bank highlighted the recent announcement of the lockdown in response to the suspected active Covid-19 case as the cause of the delay to hiking rates. At the same time, the RBNZ was identifiably more upbeat about the economy and even highlighted encouraging evidence of a key metric holding policy back elsewhere on the globe: the labour market and wage growth. The Bank also upgraded their inflation and rate path projections satisfying the currency market’s expectation of tighter rates, albeit a little further down the road. In fact, the RBNZ’s own projections for interest rates are now more hawkish than the market’s pricing, a rare tale across fixed income markets at present.
Despite not hiking rates during last week’s decision, the hawkish projections and observations by the reserve bank have sustained the probability of as many as two rate hikes in New Zealand this year. The curve steepened, encouraging investors towards the Kiwi Dollar meaning that the only adjustment to spot NZD pricing was to adjust to the slightly lower interest rate that will endure until at least the next rate decision.
Discussion and Analysis by Charles Porter