RBNZ Still wants a Cheaper New Zealand Dollar and will Cut Rates Again

The Reserve Bank of New Zealand left interest rates unchanged at 1.75% at their March 23 meeting.

Markets were expecting this outcome but they were interested in the tone the RBNZ would adopt as a downbeat message would likely put the NZD under pressure.

The minutes released following the meeting show Governor Wheeler and his team felt that the currency needs to fall further to balance growth and monetary policy needs to remain accommodative for a considerable period of time - this certainly didn’t help the local currency.

"The trade-weighted exchange rate has fallen 4 percent since February, partly in response to weaker dairy prices and reduced interest rate differentials. This is an encouraging move, but further depreciation is needed to achieve more balanced growth," read the statement.

As a result, the Pound to New Zealand Dollar exchange rate trades at 1.7720, having reached a three-month high at 1.77780 the day prior.

The New Zealand to US Dollar exchange rate trades at 0.7050 and retains a positive bias ever since recovering off the floor at 0.69 earlier in March. News that dairy prices had risen in the latest auction has certainly helped the currency.

However, losses were limited by the observation that the RBNZ also see inflation rising in the months ahead which suggests that the bank remains essentially in neutral.

With global inflation picking up it is likely only a matter of time before New Zealand feels the effects.

Therefore markets remain largely of the opinion that the next move on rates at the RBNZ will be higher; something that should keep the NZD in demand over the longer-term period.

The RBNZ now believe CPI will return to target in the medium term instead of gradually and felt that the weak Q4 GDP numbers were due in part to temporary factors.

As a result, they view the current growth outlook as positive.

“The RBNZ has grown less dovish at recent meetings and for this reason we believe that the New Zealand dollar should trickle higher after the monetary policy meeting,” says Kathy Lien, Director of BK Asset Management.

But there is no unanimous view on the RBNZ's next moves on interest rates.

RBC Capital Markets are of the opinion that the next move at the Bank will be to cut rates, not raise them.

And, this is undoubtedly negative for the currency.

"We still see risks that policy is eventually eased given the weak underlying domestic inflation pulse and elevated NZD, but the pickup in global activity suggests any further easing will not occur until later this year. Our economists have shifted their final cut from Q2 to Q4," says Lignos.

Another rate cut will diminish New Zealand's yield advantage - right now international investors send money to New Zealand to take advantage of the superior returns on offer.

Cut this advantage and the big pillar of New Zealand Dollar strength is diminished.

This is an important development that has seen analyst Hans Redeker at Morgan Stanley warn that New Zealand Dollar downside lies ahead.

And, according to Redeker, one currency that stands to gain is the British Pound.