Hawkish comments from RBNZ catches out offshore investors; RBNZ unperturbed by missing inflation target for six straight years; NZD/AUD breaches 96c

By Jason Wong

The NZD has been the star performer, following the RBNZ’s Monetary Policy Statement, up 1.7% to 0.7130, with the gains made through to yesterday afternoon being sustained overnight. 

I mentioned yesterday that the Bank would have to pull a rabbit out of a hat to prevent a further push higher in the NZD. No rabbit was exposed. Indeed, the Bank didn’t even bother running with the illusion.

The cash rate was left unchanged and an easing bias maintained, in line with the Bank’s view back in March and April. While this came as no surprise to most locals, many offshore investors were expecting a more dovish tone, and some even a rate cut, so this set the NZD alight. NZD immediately shot up from 0.7020 to the 0.71 mark and pushed higher as the Governor delivered his press conference, reaching a peak of 0.7148 by late afternoon.

While the official record shows an easing bias, there was little intent to get inflation higher. Indeed, for the second consecutive meeting, the Bank effectively engineered a tightening in monetary conditions. The message delivered was that the Bank was a flexible inflation targeter; it was unperturbed by missing its inflation target for six years running; rate cuts to get inflation higher, sooner, would cause unnecessary volatility in the economy; and financial stability, given high house price inflation, was a concern. There was definitely no Draghi-like message “we’ll do whatever it takes” to get inflation higher.

The market’s take was that NZ’s high interest rate premium to the rest of the world would be maintained and that was a good reason to buy the NZD. Currency intervention was hosed down and the Governor talked down the ability of the Bank to influence the exchange rate. The Bank’s messaging plays into our theme of a stronger-for-longer NZD over the short term.

The previous range of USD0.65-0.70 we saw over coming months probably deserves to be lifted a couple of cents to USD0.67-0.72. Near-term, further gains are likely to be harder to come by as we approach the UK referendum date of 23 June.

The NZD was higher on all the crosses and on a TWI basis sits at 76.0, a level not seen since May last year. NZD/AUD has breached 0.96 early this morning, NZD/EUR breached 0.63, NZD/JPY is through 76 and NZD/GBP trades at 0.4930.

There was little news overnight to drive currencies. The USD appears finally to have found a bid, and on a basket is up about 0.4%. The Yen has been supported on lower risk appetite, with equity markets generally in the red, with a 1% fall in the Euro Stoxx 600.

There’s a sense of markets becoming nervous with only two weeks to go before the UK referendum.

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