The Reserve Bank of New Zealand (RBNZ) steps into the limelight this week with its monthly rate statement and subsequent press conference.
On January 28 the RBNZ kept benchmark interest rates on hold at 3.50%. The decision was not unexpected as it was already priced in by the market, but Governor Graeme Wheeler did change his stance regarding the previous statement of keeping the rate at current levels “for some time” into the possibility of a cut or hike if needed. Wheeler also took the opportunity to talk down the NZD as he still thinks it is overvalued.
Current USD strength has depreciated the NZD and put less pressure on the RBNZ to cut rates. A strong U.S. nonfarm payrolls (NFP) report has put pressure on the Federal Reserve to hike rates as soon as June, in turn boosting the USD across the board. NZD/USD was trading around 0.76 before the U.S. NFP and it’s now close to breaking 0.73 ahead of the Kiwi central bank announcement. Meantime, the Federal Open Market Committee’s (FOMC) two-day meeting is just around the corner. Chair Janet Yellen, although maintaining a neutral stance, has hinted that the “patient” language contained in the Fed’s statement could be dropped in the next couple of meetings. That, too, is helping the dollar appreciate.
Mum’s the Word
The RBNZ started a rate-tightening cycle in July 2013 and this is the first time it has opened the possibility of a rate hike. Market expectations still favor a rate cut in the near future given the macro headwinds that could derail a Kiwi economic recovery.
The RBNZ is just following a central banking trend of saying as little as possible about its real intentions for fear of basing monetary policy decisions on subjective forecasts that are outside its control. Merely counting on the known events in the next six months like the U.K. general elections, the ongoing Greek debt talks, the true impact of European quantitative easing and the possibility of a U.S. rate hike, has pushed some central banks to take a more passive approach until there is more economic data to go on.
Expect Wheeler to use the opportunity to talk down the currency in an effort to depreciate the currency and give New Zealand a competitive advantage on its exports.
Infant Milk Formula Threat Downs the Kiwi Dollar
The NZD/USD was pushed further down when New Zealand police made it publicly known the nation’s largest company – dairy juggernaut Fonterra – had received a blackmail threat from a group protesting against the use of agricultural pesticide 1080. The anonymous group threatened to poison infant formula with the pesticide if it’s still in use by the end of March. New Zealand Prime Minister John Key called the threat a form of eco-terrorism, while Wellington reassured the public that no product has been contaminated, and all necessary precautions are being taken to prevent any tampering of Fonterra’s products.
Dovish comments from Wheeler will be amplified by the stirring of domestic uncertainty, and a strong U.S. dollar rally that could be derailed by the American retail sales number on Thursday, or the FOMC meeting next week.
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