New Zealand Dollar Under Pressure After RBNZ Jaws Currency And Wobbles On Growth

Amid domestic political uncertainty and a changeover at the top of the RBNZ, expectations were for a neutral statement in September. 

The Reserve Bank of New Zealand held the cash rate unchanged at 1.75% as expected Thursday but took markets by surprise when it threw a curveball in the direction of the Kiwi Dollar.

The bank told markets that rates will remain low for a “considerable period” and the weaker New Zealand Dollar that results from this will be welcomed as it will help to push up inflation.

“These dovish views drove NZD lower and is likely to keep the currency under pressure in the coming days,” says Kathy Lien, managing director of foreign exchange strategy at BK Asset Management.

While noting a further strengthening of global growth since its last statement, New Zealand’s central bank flagged that domestic construction activity has been weaker than expected.

“The RBNZ appears to have downgraded its forecast of GDP growth over the coming year. This could be a hint in the direction of a more dovish November Monetary Policy Statement,” says Dominick Stephens, chief economist at Westpac.

Downgraded expectations for growth come after the RBNZ said economic growth is expected to maintain its current pace, whereas at the last statement the central bank told markets it expects the NZ economy to strengthen further over the coming months.

“The RBNZ was never going to strike a bold new tone at this OCR Review, given the pall of uncertainty that has been cast by the election....The acknowledgement of a lower growth outlook was an important development,” says Stephens.

Part of the reason the RBNZ policy statement came as a surprise for markets is that it was expected to be broadly neutral, given it was made by acting governor Grant Spencer, who has taken over from the outgoing Graeme Wheeler while a replacement is found.

"With a new acting Governor in place, policy uncertainties in abundance, and nothing much changed since the MPS, it would be a real surprise if there was any hint of a change. If there is, it would have to be to the more hawkish side," wrote Stephen Toplis, a strategist at BNZ, on Wednesday.

New Zealand also currently sits beneath a cloud of political uncertainty, since an inconclusive election at the weekend gave way to what could now be weeks of coalition building.

“New Zealand First holds the balance of power and will decide, in due course, which way it will lean,” says BNZ's Toplis, referring to the nationalist political party that emerged from the Saturday election as kingmaker, with the third largest share of the vote.

The final result of the NZ election is expected on October 07 while the precise makeup of the coalition that will govern the country over the coming years may not be known until the end of October.

Expectations are that the incumbent National Party will govern with New Zealand First. A Nationals government is seen as the most business friendly outcome although entering coalition with NZ First will mean the adoption of some less pro-business policies..

Notably, the Nationals could now be forced to become more conservative on immigration, adopting much lower caps on the number of inbound migrants permitted to enter the country each year, which is something economists have warned could harm the NZ economy over the longer term.

The dissipation of expectations for another hike in Canada, combined with political uncertainty and central bank dovishness in New Zealand, could mean both currencies remain under pressure against the G10 basket in the coming days. Particularly against the US Dollar, which has benefitted from a Federal Reserve that is staying a course toward higher rates and fresh details of the Trump administration’s plans for tax reforms.

The New Zealand Dollar was quoted 0.24% lower against the Pound during early trading in London Thursday, making for a Pound-to-New-Zealand-Dollar rate of 1.8607. Against the greenback, the Dollar was 0.30% lower, with the NZD/USD pair trading at 0.7197.