RBNZ says NZD not yet adjusting to falling commodity prices and is unjustifiably high and unsustainable

by Kymberly Martin

NZ Dollar

The NZD was the weakest performing currency by a large margin over the past 24-hours. It has declined about 1.4% relative to the USD and now sits around 0.8580.

The RBNZ raised the cash rate by 25bps, to 3.50%, as expected yesterday. It also clearly stated that it will now pause while it assesses the impact of hikes to date.

In its short statement it also included a bold and direct warning about the level of the NZD; “With the exchange rate yet to adjust to weakening commodity prices, the level of the New Zealand dollar is unjustified and unsustainable and there is potential for a significant fall”.

It was this statement that appeared to provoke the plummet in the NZD that then followed. From above 0.8700 the NZD/USD gapped to 0.8620. It has continued to drift lower to sit below 0.8580 this morning.

The use of the word “unjustified” is significant. Within the RBNZ’s framework for considering currency intervention, one of its four criteria is that “the level of the currency must be unjustified”. We still think overt intervention is unlikely at present as it would be inconsistent with the RBNZ’s broader intention to normalise monetary policy.

However, the break lower in the NZD/USD makes it appear technically vulnerable. Support is now seen around the 0.8510 level. Today the ANZ business survey will be released. Any signs of further slippage may take an additional toll on the NZD/USD.

Unsurprisingly the NZD also sits lower on all the key crosses, after its sharp move down yesterday morning. However, it managed to stabilise on most crosses overnight. The NZD/AUD has crept off its lows last evening (around 0.9080) to trade above 0.9100 at present. Support is seen at the early-June lows around 0.9060. 

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Majors

The USD sits a little higher this morning, while the AUD underperformed along with the NZD over the past 24-hours.

Market sentiment was fairly stable and equity markets made further modest gains (Euro Stoxx 50, 0.8%, S&P500 0.1% ). This was despite the latest news from the Ukraine crisis that Prime Minister Yatsenyuk has resigned after coalition parties quit. President Poroshenko is now signalling early elections.

However, our risk appetite index (scale 0-100%) remains at a fairly healthy 78%. Assisting sentiment yesterday afternoon was the release of the HSBC China flash PMI. This came in at 52.0 (51.0 expected).

This release gave the AUD/USD a direct boost. It popped from 0.9440 to 0.9470 after the data, before a downward trend set in overnight. It sits below 0.9420 this morning.