Dovish RBA Policy Shift Drives Aussie, Kiwi Lower as Investors Prepare for Similar Move by RBNZ

The RBA dropped its long-standing prediction that an improving economy meant the next move was likely to be upwards. The New Zealand Dollar tumbled last week in sympathy with the drop in the Australian Dollar and in anticipation of a similar tone from the Reserve Bank of New Zealand (RBNZ) this week. The Dollar/Yen rose last week mostly on safe-haven buying related to a downgrade of the Euro Zone economy by the European Commission and lower demand for higher risk assets.
James Hyerczyk
AUD/USD, NZD/USD, USD/JPY

The Asia-Pacific currencies were quite active last week, setting the tone in several financial markets. Although a case can be built for thin liquidity, due to the Lunar New Year holiday, fueling some of the volatility, most of the price action was a real response to a shift in policy in the Australian Dollar, an anticipated change in sentiment in the New Zealand Dollar and renewed safe-haven buying in the Japanese Yen.

Australian Dollar

Early last week, the RBA kept its cash rate at a record-low 1.5 percent for a 30th month but dropped its long-standing prediction that an improving economy meant the next move was likely to be upwards.

RBA Governor Philip Lowe abandoned a policy tightening bias and instead sees the chances of an interest-rate cut or a hike as “more evenly balanced”. However, the RBA board does not see a strong case to move rates in the near-term.

Given the dovish comments last week from Dr. Lowe and the RBA policymakers, futures traders are beginning to price in as many as two rate cuts later this year.

The central bank cited slowing growth in other advanced economies, sluggish consumer spending and the ongoing property market correction for the shift in policy.

“This reassessment of the outlook for consumption is informed by the downward revision in the national accounts and, to some extent, the recent declines in housing market activity,” the RBA said in the quarterly statement.

In its monetary policy statement, the RBA lowered its forecast for gross domestic product (GDP) growth for the year to the end of June to 2.5 percent, down from 3.25 percent. The RBA also slashed its inflation forecast for the 12 months to June 30 from 2 to 1.25 percent.

For the week, the AUD/USD settled at .7089, down 0.0158 or -2.18%.

New Zealand Dollar

The New Zealand Dollar tumbled last week in sympathy with the drop in the Australian Dollar and in anticipation of a similar tone from the Reserve Bank of New Zealand (RBNZ) this week. Essentially, investors started to price in a potential rate cut later in the year.

For the week, the NZD/USD settled at .6745, down 0.0148 or -2.15%.

Helping to drive the Kiwi lower was a weaker-than-expected labor market report. The quarterly Employment Change was 0.1%. This was well-below the 0.3% forecast. The previous quarter was also revised lower to 1.0%. Additionally, the quarterly Unemployment Rate surged to 4.3%, higher than the 4.1% forecast. The previous quarter was revised higher to 4.0%.

This week, the RBNZ will make its first interest rate decision since November. Since then a lot has taken place with the majority of major central banks downgrading their outlooks for the global economy. In November, RBNZ Governor Adrian Orr said the central bank is not taking cuts off the table, however, last week’s price action indicates that traders are pricing in about a 42% chance of a cut as soon as June 2019.

Japanese Yen

The Dollar/Yen rose last week mostly on safe-haven buying related to a downgrade of the Euro Zone economy by the European Commission. Lower demand for higher-yielding assets fueled by renewed concerns over U.S.-China trade relations sent investors into the safety of the Japanese Yen. A drop in Treasury yields also tightened the spread between U.S. Government bonds and Japanese Government bonds, making the U.S. Dollar a less-attractive investment.

For the week, the USD/JPY settled at 109.761, up 0.256 or +0.23%.

In January, the Bank of Japan kept monetary policy settings unchanged at its January meeting, as expected. The BOJ also revised lower its forecasts for inflation over the next couple of years. Furthermore, the central bank still sees inflation moving gradually back towards its target. This has been a constant theme for quite a while without much success.

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