NZD tumbles amid dovish RBNZ

The New Zealand dollar tumbled 1.20% during the Asian session after the RBNZ surprised the market with a dovish statement. The Kiwi slid to 0.6718 against the greenback, its lowest level since June 3rd last year. The central bank held the Official Cash Rate (OCR) at record low 1.75%, as broadly expected by market participants. The disappointment stems from the fact that Governor Wheeler failed to acknowledge the recent positive developments in both inflation levels and the Kiwi trade-weighted value (-5% since the February meeting).

Inflation forecast was revised to the upside with the headline measure expected to hit 2.1%y/y in the third quarter before easing toward 1.1% in the first quarter of 2018. The RBNZ justified its decision by stating that the recent pick-up in consumer prices “was mainly due to higher tradable inflation, particularly petrol and food prices” and added that “the level of core inflation has generally remained low”. Those elements suggest that the RBNZ is in no hurry to increase borrowing cost.

In our view, the central bank is simply playing for time, waiting for the Fed to tighten further its monetary policy before making a move. Historically, as a commodity producer country, New Zealand is used to deal with stronger inflationary pressure - remember the RBNZ has a target band of 2% +/-1%. Looking at the current inflation picture, it is obvious that the RBNZ as time to see it coming. Meanwhile, it will continue to emphasize the strength of the Kiwi, which is weighting on tradable inflation.

NZD/USD is currently testing the key support area at around 0.6800-80 (previous lows). A clear break of this area is needed to trigger a sell-off in the Kiwi. We do not rule further NZD weakness, especially given the recent pick-up in US treasury yields, while Kiwi’s ones have been moving lower consistently since the beginning of the year.