Earlier today the Monetary Policy Committee of the Reserve Bank of New Zealand surprised everybody by deciding to cut the underlying interest rate with 50 basis points, despite the initial forecasts for a reduction of just 25 basis points, and also despite having some compelling reasons to maintain the rate unchanged.
Arguably, this decision of the MPC can be said to be situation-driven as opposed to data-driven, given the currently ongoing currency manipulation trend amongst major central banks, most of which scramble to attract business investment by devaluating their currencies and subsequently making them more appealing to foreign investors.
This assertion can be supported by the fact that inflation in New Zealand appreciates close to the 2 per cent target and with the solid labour data from Monday, the economic activity could be expected to pick up by the end of the year even without further liquidity stimuli from the RBNZ. Regardless, the MPC supported their ultimate decision by stating that:
“GDP growth has slowed over the past year and growth headwinds are rising. In the absence of additional monetary stimulus, employment and inflation would likely ease relative to our targets. Global economic activity continues to weaken, easing demand for New Zealand’s goods and services. […] In New Zealand, low interest rates and increased government spending will support a pick-up in demand over the coming year. Business investment is expected to rise given low interest rates…” [source]
Following the release of RBNZ’s monetary policy statement, the NZDUSD immediately collapsed with 1.20 per cent and thus broke below the fundamentally important support level at 0.64900. At one point, the pair has fallen to 0.63778, which is a price level that was last reached in late January of 2016. The pair is currently on its 10th consecutive day of a downtrend trading, and this bearish sentiment is unlikely to change in the near-term unless the RBNZ changes its general monetary stance.
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