The Reserve Bank of New Zealand held key policy rate at 2.50%, meeting market expectations. However, the overall tone of the accompanying statement was much more hawkish than before. RBNZ said that economic growth has accelerated and cited rising home prices as a pressing concern. Wheeler has changed its previous dovish tone, refraining from mentioning the overvalued ( via his and IMF’s perspective) Kiwi dollar, but instead focusing on the positives, saying that “growth in NZ economy has picked up”, and that price stability is of utmost importance.
Speaking of price stability, annual inflation has of NZ has been below RBNZ’s target for 3 consecutive quarters. This prompted Wheeler to say that he expects to keep benchmark rate unchanged in 2013. This statement is actually considered to be dovish, as current rates are lower than the historical average of above 5%. However, market saw it differently, instead interpreting it as a sign that no further rate cuts will be coming in 2013 as opposed to thinking that no rate hikes will come forth. The Kiwi dollar rallied strongly after the announcement, which tells us that speculators may have ran ahead and priced in rate cut scenario earlier on, which allowed price to hit below 0.838 yesterday.
From a technical point of view, price is still looking bearish on the short-term chart. Stochastic readings have formed a peak and is actively moving lower. On the other hand, price wasn’t able to breach 20th April high despite such a hawkish statement, with subsequent selling off towards 0.84 suggesting that overall sentiment of NZD remains bearish.
Without breaking 0.848, the bearish breakout remains in play. Stoch readings are moving up higher and suggest that a recovery/corrective bull cycle may be in play. However it is possible that price may still yet find resistance around 0.848 which may be in line with a stoch peak forming, hence enhancing the bearish pressure while at the same time allowing bears who have missed the 1st breakout entry to get into the breakout on 2nd try.
Fundamentally, we need to ask why the overall climate remains bearish despite RBNZ saying everything is ok and having virtually zero threat of rate cuts. It seems that RBNZ’s own reputation is its own undoing in this case. We started the later part of 2012 and early 2013 with a generally hawkish RBNZ, and Wheeler shook the boat violently 2 months ago with an extremely dovish switch which catalyzed the Feb slide of NZD/USD. Price recovered despite the drought as Dep Governor Spencer suddenly talked about rate hike in response to housing price threat. There hasn’t been a unified response from RBNZ and hence market may be quick to discount what Wheeler is saying with respect to the no rate change policy directive mentioned above. Couple this with the slowing economic growth in China, it is hard to fully believe in RBNZ’s assertion that global markets will rebound soon.
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