AUD/USD and NZD/USD Fundamental Daily Forecast – Kiwi Shorts Forced to Cover After RBNZ Holds Rates Steady

The RBNZ said that while inflation remained below the 2 percent target mid-point, economic developments since August did not warrant a change to “the already stimulatory monetary setting at this time”.
James Hyerczyk
AUD/USD and NZD/USD

The New Zealand and Australian Dollars are trading higher on Wednesday with the Kiwi leading the surge, following a surprise move by Reserve Bank of New Zealand (RBNZ) policymakers. Better-than-expected domestic data is helping to boost the Aussie with some of the push fueled by the surge in the Kiwi. Traders seem to be unfazed by the dimmed hopes for a near-term U.S.-China trade deal.

At 06:55 GMT, the NZD/USD is trading .6402, up 0.0073 or +1.16% and the AUD/USD is at .6846, up 0.0005 or +0.07%.

Reserve Bank Surprise: Official Cash Rate on Hold

The Reserve Bank of New Zealand (RBNZ) disregarded bank forecasts and elected to the Official Cash Rate (OCR) on hold at 1 percent. All the major banks had forecast a 25 basis point cut, with Westpac flipping back to the dovish side on Tuesday after the RBNZ reported a slight dip in business managers’ expectations of future inflation.

Prices spiked higher after the central bank announcement because a 25 basis point cut was largely priced into the lending and currency markets prior to Wednesday’s monetary policy statement.

Now that the RBNZ has decided instead to keep the OCR on hold, the major banks are going to be scrambling to reassess the outlook for next year.

The RBNZ said that while inflation remained below the 2 percent target mid-point, economic developments since August did not warrant a change to “the already stimulatory monetary setting at this time”.

It did, however, reiterate it remained “prepared to act as required”.

In a press conference after the monetary policy announcement, RBNZ Governor Adrian Orr said it was “certainly not the bank’s conscious intention” to try to surprise people.

“Market expectations have been moving around considerably”, from a cut being a 50:50 possibility to a 90 percent likelihood, he said.

Orr further added, “What we have made very clear is we believe monetary policy is very stimulatory and that we have to keep it at that position for a prolonged period of time – and that if circumstances change we will act.”

Central bank policymakers also noted “the risks to the economy in the near term were tilted to the downside.”

“Economic growth continued to slow in mid-2019 reflecting weak business investment and soft household spending,” the bank said.

“We expect economic growth to remain subdued over the remainder of the calendar year.”

RBNZ policymakers also commented on New Zealand’s robust export commodity prices and the low New Zealand Dollar price level, calling it “a useful additional offset to the weaker global economic environment.”

They further added, “Domestic economic activity is expected to increase during 2020 supported by low interest rates, higher wage growth, and increased government spending and investment. The low level of the OCR has flowed through to lower lending rates more generally, which support spending and investment.

Daily Forecast

Kiwi and Aussie traders could get a reality check later in the day with the release of a U.S. report on consumer inflation and testimony from Fed Chair Powell.

The U.S. Labor Department will release its Consumer Price Index (CPI) at 13:30 GMT. It is expected to show U.S. consumer prices rose 0.3% in October in October, and at a 1.7% annual rate. The higher the numbers the better for the U.S. Dollar.

Core CPI, which excludes volatile food and energy prices, are expected to have risen 0.2% in October, after a jump of 0.1% in September. This monthly estimate would be a 2.4% increase since October of last year.

Also on Wednesday, Federal Reserve Chairman Jerome Powell will speak to the Congressional Joint Economic Committee about the current economic outlook, starting at 16:00 GMT. Investors will be looking for additive details on the central bank’s current impression of the health of the economy after the Fed cut rates on October 30 and signaled it was nearing a pause.

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