The New Zealand dollar surged more than 1.8% on Wednesday morning amid an unexpected hawkish - or less dovish - announcement from the Reserve Bank of New Zealand (RBNZ). NZD/USD hit $0.6850 before stabilising around $0.6825. As broadly expected, RBNZ left the Official Cash Rate unchanged at a record low 1.75%. Governor Orr surprised markets by declaring “we expect to keep the OCR at this level through 2019 and 2020.” Nevertheless, he let the door open for a cut, saying “the direction of our next move could be up or down.” In the short-term, we expect NZD/USD to grind lower as investors discount a possible rate hike by the RBNZ and focus on the eventuality of a rate cut. A return towards $0.6770 seems most likely.
Investors chose to see the glass half-full rather than half-empty. Orr’s is far from a hawkish comment: rather it reveals that the central bank sees dark clouds on the horizon. Just like its neighbour Australia, New Zealand’s economy is globalised and heavily dependent on international trade. Its dependence on external demand could be difficult, especially if the Sino-American trade war worsens.
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