Kiwi Slumps After a Dovish Statement By Reserve Bank of New Zealand

The New Zealand dollar – also known as the kiwi- nosedived today after the Reserve Bank of New Zealand (RBNZ) released its monetary policy decision. In the decision, the bank left interest rates unchanged, which was expected. The lower movements of the kiwi were because of the bank’s statement that the low interests would remain until 2020. This was longer than the bank had predicted in the May meeting, when they expected to move in 2019. Today, the interest rates are at 1.75% and the bank left open the possibility that the next rate move would either be up or down.

The basis for the decision was the assessment by the officials that the economy was not growing as fast as they had expected. In July, the country released mixed data. The unemployment rate rose to 4.5% from the previous month’s 4.4% as the participation rate for the second quarter jumped to 70.90%. On the other hand, the exports in June were N$4.91 billion, which was lower than the expected N$5.06 billion. Imports increased to N$5.02 billion, which was higher than the expected N$4.92 billion. This caused the trade balance to slide to $113 million, which was lower than the expected surplus of $200 million.

In addition, the economic growth in the March quarter was 2.7%, which was lower than 4% growth in mid-2016. This slowdown was attributed to a slowdown in the activities of the firms which has reduced capacity pressure. It was also attributed to the softness in the residential investments, with the construction pace at Canterbury slowing down. This has led to the slow down in the house price inflation, which is expected to remain low partly because of the tighter lending environment. Inflation on the other hand is within the 1-3% target rate. In the second quarter, the country’s annual inflation was at 1.5% with the measures of the underlying trend in inflation at the same level.

After the announcement, the NZD/USD pair fell to 0.6665, which is the lowest level since May 2016. Traders tend to move from a low-yielding currency to a high-yielding one. Another common trading strategy is called carry trade and involves borrowing a low-yielding currency to invest in a high-yielding currency. The goal for this is to benefit from the difference or spread between the two currencies. However, for the NZD/USD pair, the carry trade method is not recommended because of the lack of a spread between the interest rates. The base lending rate in the US and New Zealand is 1.75%.

The decision today came a day after the Reserve Bank of Australia (RBA) released its interest rates decision. The bank left interest rates unchanged but the RBA governor pointed to a sooner rise in interest rates. This divergence led the AUD/NZD pair to jump as shown below.

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