NZD/USD outlook after the dovish RBNZ rate decision

NZD/USD outlook after the dovish RBNZ rate decision
Written by:
Crispus Nyaga
24th June, 04:56
  • NZD/USD pair declined after the RBNZ interest rate decision.
  • The bank left interest rate unchanged at 0.25% and pledged to extend quantitative easing.
  • The bank also warned about the risks posed by the country's border closures.
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The NZD/USD pair dropped by about 0.30% after the Reserve Bank of New Zealand (RBNZ) delivered its interest rate decision. The pair is trading at 0.6470, which is slightly lower than yesterday’s high of 0.6521.

New Zealand dollar
NZD/USD falls after RBNZ decision

RBNZ interest rate decision

New Zealand central bank left interest rates unchanged at the record low of 0.25% as most analysts were expecting. It also maintained its Large Scale Asset Purchase (LSAP) unchanged at N$60 billion. In this program, the bank is buying treasury bonds, local government bonds, and the government’s inflation-indexed bonds.

In the statement, the bank credited the government for eradicating the coronavirus illness from the country. But it also warned that the country’s growth was still at risk because of the current border closure. As such, the RBNZ said that it would be forced to offer more stimulus to help sustain the recovery.

Most importantly, the bank did not reaffirm the guidance made in March of keeping interest rates at the current 0.25%. This has led to speculation that the bank could be preparing to push interest rates negative later this year. That sentiment also appeared in the statement, which said that the staff were working to:

“ensuring a broader range of monetary policy tools would be deployable in coming months, including a term lending facility, reductions in the OCR, and foreign asset purchases, as well as reassessing the appropriate quantum of the current LSAP.”

RBNZ balance sheet

New Zealand economy recovering

Recent data and media reports suggest that the New Zealand economy is recovering. For example, data released last week showed that credit and debit card spending increased by double digits in the previous month. This has seen the NZD/USD pair rise by more than 6% in the past month.

Still, analysts expect that the economy will shrink by 20% in the second quarter after falling by 1.6% in Q1. This is understandable since the country was in lockdown in April and part of May. Meanwhile, they expect the jobless rate to jump as high as 10% by the end of the year with annual inflation slowing below the RBNZ target.

There are three main things working in New Zealand’s favour. First, the economy depends mostly on agriculture. This means that demand for produce will not slow as in the countries that depend on manufacturing.

Second, its biggest trading partners have started to reopen. In Australia, data released yesterday showed that manufacturing and services sectorsmade some progress last month. The same is happening in China, which buys a substantial amount of New Zealand goods.

Third, the country has not reported a single coronavirus case in more than three weeks, which means that business activity is returning to normal.

NZD/USD technical analysis

NZD/USD
NZD/USD technical analysis

The chart above shows that the NZD/USD pair is trading at the 50-day exponential moving average while the price is above the 100-day EMA. Also, it has moved below the XABCD chart pattern, which is a sign that the pair may continue to fall as bears target the important resistance at 0.6400.

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