The New Zealand Dollar Sent Lower after RBNZ Slashes Rates, says Quantitative Easing Ahead

- RBNZ reaches limit of rate cut potential
- Quantitative easing is obvious next step
- NZD starts week softer in response to RBNZ decision

Above: Governor Adrian Orr at a press conference detailing the RBNZ decision to cut interest rates to 0.25%. Image courtesy of RBNZ.

- GBP/NZD spot: 2.0375
- Bank transfer rates (indicative): 1.9662-1.9800
- FX specialist transfer rates (indicative): 1.9900-2.0190 >> More information

The New Zealand Dollar lost value against the Pound, Dollar and other major currencies on Monday, March 16 after the Reserve Bank of New Zealand (RBNZ) surprised markets by cutting interest rates by a sizeable 75 basis points and signalled that it would soon engage in a programme of quantitative easing to try and limit the negative economic impact of the global coronavirus pandemic.

The cuts come as the RBNZ joins its global peers in attempting to limit the negative impact of the coronavirus outbreak on the domestic economy, particularly as the country this weekend announced it would place strict quarantine measures on all people arriving in New Zealand.

This leaves the Official Cash Rate (OCR) at 0.25%, leaving a country that once boasted the highest interest rates in the developed world on par with the likes of the Bank of England, thereby closing what was once a wide interest rate differential.

"The RBNZ's emergency rate cut of 75 basis points is a last-ditch attempt to alleviate an almost inevitable recession. Now it's the New Zealand government's turn. Against the backdrop of an impending global economic downturn, the NZ dollar can be expected to remain dispirited for the foreseeable future. The magnitude and timing of the recent rate cut has rather caused panic among investors," says Marc-André Fongern, Head of FX Spot & Options  at Fongern Global Forex.

The superior yield offered by New Zealand financial assets courtesy of the RBNZ's high interest rates since the global financial crisis has been a key pillar to New Zealand Dollar value over the past 12 years. For many years investors would take out cheap loans in currencies such as the Euro, Pound and Dollar and invest in high-yielding currencies such as the New Zealand and Australian Dollars.

But by slashing interest rates over recent months, the RBNZ has ultimately removed this pillar of support for the currency, creating the potential for further declines.

Not only has the RBNZ opted to cut interest rates, but it appears policy makers are now prepared to introduce a programme of quantitative easing, whereby they buy up assets such as government bonds to boost the supply of cheap money into the economy.

Similar moves at other global central banks over recent years has tended to result in a weakening of the currency they issue, therefore any such moves in New Zealand could spell further NZ Dollar weakness.

"The central bank said the OCR will remain at this level for the next 12 months and that should any further stimulus be required, it will come in the form of a Large Scale Asset Purchase (LSAP) programme of government bonds rather than further OCR cuts. The next RBNZ meeting will now take place in May, instead of 25 March, given today’s easing," says Jonathan Koh, Economist at Standard Chartered.

Koh says the RBNZ is of the belief that because New Zealand’s debt markets are small versus other countries, rolling out programme of quantitative easing will present challenges.

"However, as the financial system is not operationally ready for negative interest rates, the committee judged that LSAPs are the most suitable in this circumstance," says Koh.

The New Zealand Dollar is softer against developed market currencies in the wake of the RBNZ decision and growing expectations for quantitative easing measures to be introduced:

The Pound-to-New Zealand Dollar exchange rate is quoted at 2.0436, down 0.26% today but up 0.92% since the week's opening on Sunday.

The U.S.-to-New Zealand Dollar exchange rate is quoted at 0.6056, up 0.15% today but down 0.25% since markets opened on Sunday.

The Australian-to-New Zealand Dollar exchange rate is quoted at 1.0215, up 0.15% today, but up 0.37% since Sunday's open.

"The NZD has been broadly unchanged since the 13 March close, despite the RBNZ’s 75bps emergency rate cut, as the market was already pricing substantial easing. Fed easing of 100bps earlier has also cushioned NZD/USD," says Mayank Mishra, Global FX and Macro Strategist at Standard Chartered.

Mishra expect the NZ Dollar to find support versus the U.S. Dollar, after taking significant losses year to date, as aggressive Fed easing turns yield differentials
in its favour.

"However, we expect the weak growth outlook and risk sentiment to continue to weigh on the currency, which is likely to continue to underperform lowyielding G10 peers like the JPY, CHF and EUR," adds Mishra.