RBNZ Surprise Sends NZD/USD Sharply Lower

The RBNZ has just announced a surprise intra-meeting economic assessment today. This has sent the NZD 100 points lower to 7200.

The following message popped up on their website a couple of hours ago:

“The Bank will issue a brief update on its economic assessment on Thursday 21 July at 9:00am, given the longer-than-usual gap between MPSs as the Bank moves to its new release timetable this month. This will not include an OCR review decision. The next OCR review will occur with the 11 August MPS.”

The street has interpreted this very dovishly. The quite valid assumption being, that if everything was happy at the RBNZ, they wouldn’t need to say anything at all until the next MPS. Most analysts, myself included, are thinking they will use the opportunity to express their displeasure.

The NZD has recently been one of the strongest-performing major currencies. Strong migration flows, a bubbling economy and high real interest rates have combined to get an underlying bid tone on the NZD. This will not be helped one bit by what looks like an increasingly dovish Federal Reserve, and thus a respite via a stronger USD looks like an increasingly distant memory.

The RBNZ’s problem with the NZD is not its effective exchange per se, it is its effect on the underlying exchange rate. For background, the Governor of the RBNZ is obliged by law to maintain inflation between a legally mandated target, in this case 1 to 3%. Although Mr Wheeler’s preferred level would ideally be around 2%.

This has been persistently undershot, despite the RBNZ’s best efforts. With New Zealand running a quite eye-watering and perpetual current account deficit, the effect of a higher currency is to add downward pressure on CPI and thus inflation.

The usual response of cutting interest rates from 2.25% record lows is an undesirable outcome right now for the RBNZ. The reason being that New Zealand’s housing market is on fire and not just in Auckland. Leave rates unchanged = NZD higher, cut rates= housing market gets even hotter. You can see the conundrum.

My guess is the RBNZ will express their dismay at the level of the NZD both against the USD and on a TWI basis in an attempt to talk it down. That is certainly what the market is interpreting it as. Given the factors above I am struggling to see it having any lasting effect.


The NZD/USD has resistance at 7310 and support in the 7210/20 area (previous congestion zone). A break below could open a pop to 7120. With the daily RSI smack in the middle at 56, the short-term moves could go either way. I am inclined to think any meaningful dips will be eagerly sought and short lived.

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