Fundamental Analysis: NZD Jumps on Reserve Bank’s Rate Comments

Fundamental Analysis: NZD Jumps on Reserve Bank’s Rate Comments

There was a big shock in currency markets early this morning as the Kiwi dollar posted huge gains against most majors. NZD rose sharply after the Reserve Bank of New Zealand indicated, against all expectations, that it still might raise rather than cut its cash rate in the foreseeable future.

NZD-USD bounced from recent lows to trade above 0.6850 for a period. The New Zealand dollar also gained below NZ$1.66 to the euro and, significantly, above the important area of ¥75. In each case though, price has now corrected slightly from the early morning’s highs.

Orr the Surpriser shocks markets

The near-universal expectation of both traders and professional analysts before this morning’s meeting had been for the RBNZ to hint at cutting rates in 2019. Governor Adrian Orr though wasn’t one to be predictable. Instead of a dovish turn, he stressed that the central bank’s focus remains on the domestic economy, which is currently doing well. This, he said, means that the cash rate could well go up in the next few years.

NZD’s reaction was almost immediate, shooting up over 100 pips against the US dollar. Markets appear to have realised that data of late does mostly back up Governor Orr’s claims. Inflation at 1.9% remains very close to the RBNZ’s target of 2%. New Zealand’s trade balance last month also posted its first positive figure since May 2018. Business confidence - although still negative - improved drastically towards the end of last year.

The most important reason for such a major reaction to the RBNZ’s meeting is traders’ focus on the cash rate for NZD. More so than with other currencies, interest rates have a major effect on the Kiwi dollar. This in turn stems mainly from the Reserve Bank’s maintenance of 1.75% for such a long time, even when so many other central banks cut to near zero.

Spotlight still on Orr, but Thursday’s data in view

Given the shock of this morning’s events, Governor Orr is likely to be the focus of traders this evening as well. The governor is due to testify to New Zealand’s Finance and Expenditure Select Committee at 19.10 GMT tonight. Traders will be looking for any further clues about which way the cash rate might go, plus any extra details Mr Orr might give about the RBNZ’s economic outlook.

Data might be playing second fiddle to the central bank this week, but tomorrow night still features a few important releases. The biggest of these is manufacturing PMI, due at 21.30 GMT on Thursday. The current forecast is for a slight decline to 54.5.

Some tailwinds looking likely for NZD

An overall upward direction for the Kiwi dollar appears to be the most likely outcome this week, based on current fundamentals. Rate differentials are likely to limit any further gains against the US dollar though. How long NZD’s strengthening movement could last will probably depend on tomorrow’s data.

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