There are dovish statements and then there are dovish statements. The Reserve Bank of New Zealand kept cash rate at 2.50%, but beefed the decision with strong dovish outlook. In the Monetary Policy Statement, Governor Wheeler said that NZD’s strength is a “significant concern”. Central banks and sovereign funds have been and is continuing to buy NZD, which may give scope for a rate cut. Though market expected Wheeler to maintain interest rates at current level, analysts did not expect Wheeler to mention rate cut as an option explicitly. The common understanding after G20 meeting last month is that Central Banks should refrain from pushing currencies in a competitive manner, and RBNZ has indicated willingness to ease without going into specifics. This clear mention of NZD is a move away from recent norm and resulted in NZD/USD trading sharply lower.
Downtrend has been accelerated with the sell-off. Price broke the 0.82 support which is currently acting as a strong resistance against pullbacks. Stochastic readings is still rather shallow, with the trough still have space to head lower. If price manage to break above 0.82, there could still be resistances in the form of Channel Bottom and also 0.82 – 0.84 resistive band. Current breakout will only be negated if price managed to climb back towards the 0.824-0.828 trading band which will break the current chain of Lower Lows and Lower Highs to shift the gear from bearish to neutral.
From a 2013 perspective, price is looking likely to close below the 1st Jan low, which has been acting as a support back in March (blue dotted line). If bearish sentiment has gathered pace after the RBNZ announcement, a retest of the Dec low may be likely, with a possible break potentially sending price to test the Nov 2012 lows.
Governor Wheeler has gone on record to say that NZD is “overvalued by 10-15%” and said that Today’s fall in Kiwi was “good”. It remains to be seen whether such talks will suffer sanctions by fellow G20 members after specific warnings not to give direct guidance on currency rates. However, it is also likely that G20 may remain silent as New Zealand economic size will allow it to remain under the radar, while G20 continue to figure what to do with the elephant in the room – Japan and BOJ.
On the other hand, it is strange that Wheeler has highlighted Housing Bubble as a concern and threatening lower interest rates at the same time. The lower interest rates will potentially drive demand higher as mortgage rates will almost certainly fall. A cheaper NZD may also make foreign funds find properties cheaper, encouraging demands from abroad. With these concerns, one truly wonders if RBNZ will be able to carry out their intended rate cut.
But rate cut is what people are asking for, or rather, easing actions is what the economy needs. New Zealand is still suffering from the worst drought in 10 years and any form of assistance that the Central Bank can lend will be appreciated. This puts NZD/USD outlook to be bleak. Cut rates and save the economy, NZD/USD go down; allow rates to stay and economy suffer, NZD/USD go down. Wheeler may surprise us with something out of his hat by doing unorthodox easing methods that could prop up Kiwi while helping the local economy. However by the looks of it, Wheeler wants a lower NZD and it seems that he will get it, with or without rate cut.
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