HiFX's Dan Bell looks at the 1st OCR review from new RBNZ Governor Wheeler that sent the NZ$ higher, and his 1st speech that sent the Kiwi lower

Here's our weekly currencies outlook and review with HiFX's Senior Dealer Dan Bell, including a look at the first two official statements from new Reserve Bank Governor Graeme Wheeler, being his first Official Cash Rate (OCR) announcement, and his first public speech as Governor.

Bell says Wheeler's first moves - leaving the OCR unchanged at its record low of 2.5% and ruling out quantitative easing but not intervention in the currency markets to combat the strong New Zealand dollar - may be a case of sticking to the Reserve Bank script, but his comments, and potentially actions, could change if the Kiwi rallies even higher against the greenback.

"He (Wheeler) is definitely keeping to the script and following through with what the central bank has been focusing on," says Bell. "(But) it would be interesting to see how his sentiment might change if the New Zealand dollar did continue to rally, and particularly in light of where we're sitting at the moment, around US82 cents against the US dollar. How would his sentiment change if we were suddenly at US88c or US90c as some analysts are suggesting?"

The Kiwi hit a post 1985 float high of US88.20c on August 1 last year.

'Less downbeat and less dovish than expected'

As for the OCR statement specifically, Bell says it struck a more hawkish tone than expected, but held no real surprises.

"Graeme Wheeler's first statement was pretty orthodox. Really nothing to surprise the market. If anything it was less downbeat and less dovish than the market was expecting, which actually gave the New Zealand dollar a bit of a boost."

The New Zealand dollar rose from about US81.50c before the announcement to above US82c after it.

Bell says the statement was largely "the same old stuff" from the Reserve Bank about about price stability, with mention of increased housing market activity and comment the Christchurch rebuild was going to start having some impact on growth.

"It was less dovish than expected, not really that hawkish but gave the New Zealand dollar a boost."

Wheeler's speech ruled out quantitative easing, or money printing, but suggested intervention in the currency markets to try and combat a strong Kiwi dollar was not completely out of the question, albeit only if the Reserve Bank's four criteria were met. These are;

1) Whether the exchange rate is exceptional relative to history;

2) Is the exchange rate justified;

3) Would intervention be consistent with the Reserve Bank's Policy Targets Agreement;

4) Whether the market conditions exist to successfully shift the value of the currency.

'Market surprised'

Overall his speech painted a picture of an orthodox, inflation targeting Reserve Bank Governor. The immediate reaction was a drop in the New Zealand dollar after he noted the Reserve Bank did want to see a lower exchange rate.

"He made some mention of the high New Zealand dollar and in response the Kiwi dropped about 40 basis points (against the US dollar)," Bell says. "So we were sitting around US82.20c and it traded all the way down to even lower than US81.60c. The market was surprised that he came out with some comments about the dollar this morning considering he seemed to be more hawkish yesterday."

Meanwhile, Bell notes there hasn't been a lot of volatility in recent weeks, with the Kiwi trading in a range between US81c and US82.50c. This was happening against a backdrop of weakness in global stock markets as major US listed companies report third quarter financial results.

"Earnings guidance from a lot of the big companies reporting in the US has been less than expected so US stocks have been under some selling pressure over the last few weeks. The US equity market last week had its worst week in about four months. So contrast that with the third quarter where we had a massive rally in global stocks and obviously the big central bank stimulus announcements were part of that story," says Bell.

"We've already had a big rally in the (share)markets this year and looking ahead there are still some big challenges. The New Zealand dollar versus the US hasn't been trading as closely with the risk-on, risk-off thing that has dominated markets for the last few years. Although if we continue to see weakness in the US stock market, and that flows through to sentiment, I think the New Zealand dollar will have more downside potential over the next couple of months."

To subscribe to our free daily Currency Rate Sheet and News email, enter your email address here.

---------------------------------------------------------

Dan Bell is the Senior Dealer at HiFX, a UK-headquartered foreign exchange dealer with significant operations in Australia and New Zealand. It has a dealing room in Auckland. See more detail here.