Wheeler Prompts Fresh NZD Sell-Off on Interest Rate Warning

Above: RBNZ Governor Wheeler, © Pound Sterling Live 2015.

The New Zealand Dollar (NZD) has fallen against the British pound and other majors on global currency markets following the latest interest rate review at the Reserve Bank of New Zealand.

Traders were caught wrong-footed going into the meeting as they had expected to the Bank to maintain their tone concerning the prospects of interest rate rises over the course of 2015.

However, Governor Wheeler stated that any move in the OCR will be data dependent; markets took this as a sign that rates would be kept ‘lower-for-longer’ and will in turn keep NZD valuations suppressed.

Furthermore comments on the NZD being overvalued despite its 16% fall in the past few months spooked investors.

"Clearly the drop in oil prices and the resulting drop in inflation is giving them room to try and pursue a weaker currency,” says a note issued by Tuatara Management in Auckland following the decision.

As a result we see the pound sterling trading above an exchange rate of 2.07 while against the US dollar the kiwi is below 0.73.

As we saw back in September, the kiwi dollar has been particularly sensitive to suggestions by the central bank concerning how expensive it has become on the global financial markets.

Beware the Surprises

Markets are now almost fully pricing a rate cut as the RBNZ’s next move.

However, there are some in the currency markets who think markets may be overestimating the prospect of a near-term interest rate rise.

“While we don’t rule this out as a possibility, we think the rationale for doing so, based on current economic evidence, is limited. In particular, we struggle with the 30% probability the market attributes to an OCR cut at the 12 March MPS,” says Stephen Toplis at BNZ.

If BNZ is right the NZ exchange rate could be in for corrective moves higher as this realisation is digested by markets.

Despite BNZ’s concerns over a March interest rate rise they do caution that this does remain their central scenario.

Strong New Zealand Dollar Undermines the Economy

On the issue of over-valuation in the NZD today’s OCR review was always going to be a test of the Reserve Bank’s risk preferences.

Traders and analysts were asking whether the RBNZ was more nervous about the possibility that the ongoing strength in the New Zealand dollar might undermine the economy, or whether the housing market is again overheating.

“We are erring on the latter view. The RBNZ today showed that it is leaning to the former.

Toplis tells us:

“The January OCR review was the RBNZ’s most proactive attempt yet to get the currency down. In removing its tightening bias and opening the door to the possibility of a rate cut markets have, unsurprisingly, driven the NZD lower and started to fully price in a rate cut.”

Data Points to Watch

Ahead of the March meeting, which will be key for the kiwi dollar and interest rates the following data points will attract much attention:

Housing market figures which could show further strength in sales and prices;

Labour market data which could reveal strong growth in employment and a modest overall tightening in conditions;

Business and consumer confidence data which could remain consistent with above-trend economic growth;

Q4 retail sales which could see annual growth in real spending sitting at just under 5.0%;

A terms of trade outcome that may be better than the RBNZ’s published views thanks to falling oil prices;