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James Hyerczyk

The New Zealand Dollar is trading higher on Wednesday after the Reserve Bank of New Zealand (RBNZ) fueled a decent short-covering rally when it announced it was holding interest rates unchanged. Central bank policymakers also presented a more upbeat assessment of the economy.

The Australian Dollar rose in sympathy with its counterpart currency and in reaction to positive economic data. Both the Kiwi and the Aussie are also being underpinned by increased demand for higher-yielding currencies.

At 05:48 GMT, the NZD/USD is trading .6461, up 0.0057 or +0.89% and the AUD/USD is at .6731, up 0.0017 or +0.26%.

New Zealand Dollar

The RBNZ held rates at record lows on Wednesday, as expected, but sounded more confident on the economic outlook and dropped previous references to the chance of future cuts, sending the Kiwi soaring.

At its first meeting of the year, the RBNZ flagged new risks to the economy from the coronavirus epidemic in China but expected any impact to be limited.

While the RBNZ held rates at 1% as expected in a Reuters poll of economists, the statement omitted a line used in previous policy statements that it would add further monetary stimulus if needed. It also delivered noticeably more upbeat comments about employment and consumer prices.

The central bank also raised the forecast path for rates this year to 1%, from 0.9% previously, removing the chance of a cut.

The RBNZ said in its statement that economic growth is expected to accelerate over the second half of 2020 driven by monetary and fiscal stimulus, and the high terms of trade. The monetary policy statement also indicated a more upbeat employment and consumer prices expectations. However, soft momentum in economic growth has continued into early 2020, it said.

When asked about whether an “insurance cut” was considered by the policy committee to pre-emptively head off any virus hit to the economy, RBNZ Governor Orr said:  At this point, we didn’t see a need for a cut in the OCR with regard to a specific event.”

“We already have very low and stimulatory interest rates, we have a very good starting position with inflation at its midpoint, employment at maximum if not slightly above, global growth having stabilized,” said Orr.


Australian Dollar

Australian consumer sentiment improved slightly in February as the threat from bushfires eased across the eastern seaboard, though concerns over the spread of the coronavirus in China and globally loom as a fresh headwind.

Wednesday’s survey showed the Melbourne Institute and Westpac Bank index of consumer sentiment rose 2.3% in February, from January when it fell 1.8%.

Daily Forecast

The New Zealand Dollar could find support over the near-term as the major banks make adjustments to their interest rate forecasts. It looks as if the RBNZ is going to hold rates steady this year unless the coronavirus epidemic derails the economy. This is a potentially bullish development.

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