New Zealand Dollar Leads the Pack in Wake of RBNZ Decision

The New Zealand Dollar lead the pack in mid-week foreign exchange trade, aided by supportive global equity markets and a central bank that will likely raise interest rates by next year.

The Reserve Bank of New Zealand (RBNZ) delivered an unremarkable April policy update Wednesday: exactly the kind of outcome that would prompt investors to unwind some of the negativity towards the Kiwi currency that had built up over recent weeks.

The New Zealand Dollar has lost ground against all its G10 peers over the course of the past month, but near-term fortunes were boosted by the RBNZ and the currency is the best performer on the day:

• GBP/NZD spot rate at time of writing: 1.9429
• Bank transfer rate (indicative guide): 1.8750-1.8000
• FX specialist providers (indicative guide): 1.8880-1.9200
• More information on FX specialist rates, here
• Set an exchange rate alert, here

The losses recorded by the currency over the past month follow a change in government housing policy, announced in March, which presumably eased the pressure on the RBNZ to pursue higher interest rates in order to cool a heating market.

The general rule of thumb in FX remains that when a central bank moves towards raising interest rates, the currency it issues rises in value. When that interest rate rise recedes into the distance, the currency it issues declines.

Following the new government housing policy initiatives, investors bet the RBNZ now has the scope to push back the timing of their next rate hike and the New Zealand Dollar lost ground as a result of this shift in perception.

But today's RBNZ could represent a high-water mark for this trade and the New Zealand Dollar is finding its feet once more as a result.

Economists at New Zealand lender ASB explain that for the RBNZ, the recent strength of house prices has escalated from merely being an influence on the economic outlook.

"High house prices have become a financial stability concern," says Nick Tuffley, Chief Economist with ASB in Aukland.

Following the government changes, "the RBNZ may not need to adjust its own house price and economic view that much," says Tuffley.

The RBNZ’s monetary policy committee held its official cash rate at 0.25% and kept the asset purchase programme unchanged.

ASB say they are forecasting an interest rate rise in August 2022. 

"The committee agreed that, in line with its least regrets framework, it would not remove monetary stimulus until it had confidence that it is sustainably achieving the consumer price inflation and employment objectives," said the statement from Governor Adrian Orr.

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He also said "given that uncertainty remains elevated, gaining this confidence is expected to take considerable time and patience."

"The RBNZ came and went without much fanfare. They repeated their threat to lower the OCR if necessary though no one really believes it at this point," says Elsa Lignos, RBC Capital.

In line with other central banks, they are trying to get ahead of the upcoming jump in inflation, saying it is likely to exceed the 2% target "for a period" but that will be temporary and that gaining the confidence to remove monetary stimulus "is expected to take considerable time and patience".

Following the RBNZ briefing the New Zealand Dollar advanced against its peers:

The Pound-to-New Zealand Dollar exchange rate fell a third of a percent to quote at 1.9427, the New Zealand Dollar-to-U.S. Dollar exchange rate rose over half a percent to quote at 0.7099.