In the current environment, “doing nothing” is equivalent to a de-factor tightening of policy and so it was for the RBNZ and BoJ – both sat on their hands, resulting in 1.9% and 3.1% gains in their currencies against the USD respectively.
The RBNZ’s no-change policy stance and hints of a slightly more hawkish tone to the statement came as a shock to many.
With a one-third chance of a 25bps cut priced in and those who thought the Bank would stand pat expecting a dovish statement, the decision sent the NZD rocketing ahead.
The TWI is up 1.4% since the decision and the odds favour a push higher over coming weeks. NZD/USD reached a high of 0.6990 and it seems only a matter of time before we revisit the 0.70 handle.
Many thought Governor Wheeler had turned over a new leaf when he surprised the market with an easing in March. He’s finally “got it”, was a common feeling as he seemed more determined to get inflation higher. That theory was quashed yesterday and whereas some thought the OCR could fall to as low as 1.5% (3 more cuts), many are now questioning whether the bank delivers even one more cut. That sentiment should provide near-term support for the NZD.
The RBNZ continued with its usual rhetoric on the currency, indicating that was higher than appropriate given NZ’s low commodity export prices. It added that a lower NZD is desirable to boost tradeables inflation and assist the tradeables. The market rightly ignored these hollow words, given the context of the Bank choosing to run with a policy stance that it knew would drive the NZD higher.
The BoJ suffered the same fate as the RBNZ, with an unwanted rebound in the Yen following its shock move to offer no further stimulus at this time, even with a fresh inflation report ahead of its meeting showing a further undershooting of CPI inflation relative to target. After an initial 2% fall, USD/JPY fell further after Governor Kuroda’s press conference offered nothing new and it currently sits around the 108 mark.
The USD TWI has fallen about 0.8%, not helped by its fall against the Yen but EUR and GBP have also made modest gains. Expectations for a weak Q1 came to fruition with US GDP coming in at an annualised 0.5%. The core PCE was slightly stronger than expected at 2.1% y/y, but the combined result was enough to suggest that the Fed’s “proceed cautiously” stance was still at play.
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