FXStreet (Bali) – Imre Speizer, FX Strategist at Westpac, notes how the RBNZ, by cutting the OCR by 25bp to 3.25%, surprised the market, which had earlier priced in only a 44% chance of a cut. Speizer adds that the press release placed much weight on the fall in dairy prices.
Key Quotes
The guidance signalled a follow up 25bp cut: “We expect further easing may be appropriate. This will depend on the emerging data.”
“The 90-day interest rate forecast reinforced that, reduced by 56bp at the March 2017 point to 3.11% (from 3.67%. Prior to the announcement, the swap market had its track at 3.50% at the March 2017 point.”
“The previous warning about the high NZD exchange rate was repeated, but with different words: “With the fall in commodity prices and the expected weakening in demand, the exchange rate has declined from its recent peak in April, but remains overvalued. A further significant downward adjustment is justified. In light of the forecast deterioration in the current account balance, such an exchange rate adjustment is needed to put New Zealand’s net external position on a more sustainable path.”
This compares to April’s: “… the New Zealand dollar continues to be unjustifiably high and unsustainable in terms of New Zealand’s long-term economic fundamentals. The appreciation in the exchange rate, while our key export prices have been falling, is unwelcome.”
“Market reactions to the MPS were emphatic. NZD/USD plunged from 0.7200 to 0.7019. We expected 0.7000 to be tested during the day ahead. AUD/NZD rose from 1.0780 to 1.1023, and if it can hold above 1.1000 will probably settle in the old 1.1000-1.1200 range.”
“2yr swap rates fell from 3.37% to 3.18%. The 10yr fell from 4.16% to 4.06%, steepening the curve. We expect the 2yr to gravitate towards 3.10% during the sessions ahead.”
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