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NZ Dollar Drops on Monetary Easing Outlook

September 24, 2020 at 12:03 by Vladimir Vyun

10 NZD banknote on 20-dollar noteThe New Zealand dollar together with its Australian counterpart remained the weakest among most-traded currencies on the Forex market during today’s trading. The reason for such a poor performance was the outlook for monetary easing from the central banks of New Zealand and Australia.

The Reserve Bank of New Zealand signaled yesterday that it continues to prepare for implementing negative interest rates and other measures to stimulate the struggling New Zealand economy, which got a serious blow from the COVID-19 pandemic. Currencies usually weaken when their respective central banks loosen monetary policy, and the outlook for monetary easing from the RBNZ was very unfavorable to the New Zealand dollar. Economist at UOB Group Lee Sue Ann predicted that the central bank will likely make a move in April:

We think it is looking more likely that the RBNZ will cut the OCR, but we will only be revising our forecasts following the November meeting. In terms of timeline, at this juncture, the RBNZ looks likely to cut the OCR by 50bps at the 14 April 2021 meeting, alongside a FLP, pausing thereafter. Moving in February or April should not really matter in terms of policy effectiveness, since the move will have been well-signaled in advance, which we believe the RBNZ will indicate (and commit to) latest by the 24 February meeting. Moreover, the RBNZ has pledged to keeping the OCR unchanged until March 2021, and has made no promises – or even forecasts – beyond that point. We take this forward guidance seriously.

As for today’s macroeconomic data in New Zealand, it was not especially bad. Statistics New Zealand reported that the trade balance turned from a surplus of NZ$447 million to a deficit of NZ$353 million in August. Yet the deficit was far smaller than the average monthly deficit of NZ$1.3 billion in the previous five August months. Exports rose by 8.6% from a year ago, while imports dropped by 16%.

NZD/USD dropped from 0.6545 to 0.6518 as of 12:02 GMT today. EUR/NZD rallied from 1.7799 to 1.7852. AUD/NZD slipped from 1.0794 to 1.0786.

If you have any questions, comments, or opinions regarding the New Zealand Dollar, feel free to post them using the commentary form below.

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