On Wednesday night, the New Zealand dollar fell in relation to the US dollar over 2 percent. The NZD/USD exchange rate fell to its lowest level since January 2016 after a surprising cut in interest rates by the Reserve Bank of New Zealand.
The market and investors assumed that as the conflict between the United States and China escalated, the Reserve Bank of New Zealand (RBNZ) would be more supportive of cutting the main interest rate at the August meeting. The market consensus assumed a cut of a quarter percentage point. Nevertheless, RBNZ surprised investors with a cut of half a percentage point, which could have plunged the New Zealand dollar. What's more, the Australian dollar also reacted to the RBNZ decision and the AUD/USD fell to a ten-year low, as the market speculates that the Australian Central Bank may follow in the footsteps of the RBNZ.
It was the first reduction in interest rates in New Zealand since May this year to support employment and inflation prospects while weakening global economic growth and declining activity in international trade. The statement gave details motivating the Wednesday decision: Global economic activity is still decreasing, reducing the demand for goods and services in New Zealand. Increased uncertainty and decreasing international trade have contributed to lower growth in the number of trading partners. Central banks ease their monetary policy to support their economies. Global long-term interest rates have fallen to historically low levels, in line with low expected inflation and future growth rates.
Adrian Orr, Governor of the RBNZ, added in his statement that there is no point in refraining from rate cuts when global outlook deteriorates. Orr also added that the central bank is very advanced in work on unconventional policy and is ready for further easing of monetary policy. Thus, the RBNZ left the door open for further cuts, and the market is pricing in another interest rate cut of 25 basis points by February, which may put pressure on NZD.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal Opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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