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In view of Jane Foley, senior FX strategist at Rabobank, RBNZ was the first G10 central bank to cut interest rates this year and has been one of the most aggressive on policy with the ODR being slashed by 75 bps since May.

Key Quotes

“This morning’s speech from RBNZ Governor Orr referred to the Bank’s rate cutting policy this year as “early and large”. He judged that a more tentative plan would have risked inflation expectations remaining stubbornly below the inflation target. The RBNZ is clearly pleased with the outcome of this policy to date.”

“The NZD is the second worst performing G10 currency in the year to date after the SEK and the RBNZ must be satisfied with this outcome. Despite the fact that the RBNZ has appeared less dovish than expected this week, we see further downside potential for NZD/USD in the coming months.”

“The pre-emptive and aggressive nature of RBNZ rate cuts this year has taken the OCR to a record low of 1%. By acting pre-emptively and providing early support to the economy, policy makers are clearly trying to limit the overall amount of accommodation that will needed.”

“The NZD reacted positively to Orr’s remarks on unconventional policy measures. The take-way from the central bank is that it remains relatively upbeat on the current levels of demand in the economy and that any risk of QE appears distant. However, Orr did dip his toe into other waters. Specifically the RBNZ Governor used this speech as a rallying cry to the government to be prepared to increase fiscal policy to boost growth.”

“Earlier this month New Zealand Finance Minister Robertson stated that the government would respond “if we see further deterioration”. The 2019 budget which took effect in July plans NZD10 bln of new capital spending and transport spending of NZD17 bln over four years. The inference from Orr’s speech is that this may not be enough.”

“In our view trade tensions between the US and China are unlikely to be fully resolved by next month high levels talks and we expect headwinds to growth to remain substantial. We continue to see risk that the RBNZ will be again pressured into cutting rates in the months ahead and we expect NZD/USD to be trading in the 0.61 area on a 12 month view.”