Australian Dollar surges to two-month highs as the RBNZ sinks the New Zealand Dollar

AUD/NZD rallies 0.9% to 1.2240 as the RBNZ's forward guidance disappoints.
The New Zealand central bank hiked interest rates but hinted at a more gradual tightening pace.
Australian GDP growth beat expectations in Q2 and boosted hopes of further RBA hikes.

Guillermo Alcala FXStreet

The Aussie Dollar (AUD) rallies nearly 0.9% against an ailing New Zealand Dollar (NZD) on Wednesday, boosted by a combination of investors' disappointment after the Reserve Bank of New Zealand’s (RBNZ) monetary policy decision, and bright Australian Gross Domestic Product (GDP) figures released earlier on the day. The AUD/NZD pair has jumped about 140 pips to hit fresh two-month highs at 1.2241 so far.

In New Zealand, the RBNZ lifted the Official Cash Rate by 25bp to 2.75% as expected, yet, as Danske Bank analysts note, it “signalled a more gradual tightening path than markets had priced in.”

Danske Bank experts assess that the New Zealand central bank's comments highlighting "downside risks to the economy,” and the “rate projections remaining well below market pricing,” explain the softer currency reaction despite the policy move.

RBNZ Governor Anna Breman said that the key question is "whether economic recovery expands as expected," and hinted at further rate hikes but asked for more time to "evaluate the policy stance" and refused to commit to a fixed rate path.

Australian GDP boosts hopes of RBA tightening

The Australian Dollar, on the other hand, has been boosted by stronger-than-expected economic growth in the second quarter. GDP data released earlier on Wednesday revealed that the economy expanded at a 0.4% pace from April to June, beating expectations of a 0.3% growth, and following a 0.3% rise in the first quarter.

Year-over-year, the Australian GDP grew at a 2.1% pace, according to data released by the Australian Bureau of Statistics. These figures heighten hopes of "an RBA rate hike this month even as the housing market tumbles,” according to Rabobank analysts, a combination, they suggest, “very few Aussies would have predicted.”

Economic Indicator

RBNZ Interest Rate Decision

The Reserve Bank of New Zealand (RBNZ) announces its interest rate decision after each of its seven scheduled annual policy meetings. If the RBNZ is hawkish and sees inflationary pressures rising, it raises the Official Cash Rate (OCR) to bring inflation down. This is positive for the New Zealand Dollar (NZD) since higher interest rates attract more capital inflows. Likewise, if it reaches the view that inflation is too low it lowers the OCR, which tends to weaken NZD.

Why it matters to traders?

The Reserve Bank of New Zealand (RBNZ) holds monetary policy meetings seven times a year, announcing their decision on interest rates and the economic assessments that influenced their decision. The central bank offers clues on the economic outlook and future policy path, which are of high relevance for the NZD valuation. Positive economic developments and upbeat outlook could lead the RBNZ to tighten the policy by hiking interest rates, which tends to be NZD bullish. The policy announcements are usually followed by interim Governor Christian Hawkesby's press conference.

Economic Indicator

Gross Domestic Product (QoQ)

The Gross Domestic Product (GDP), released by the Australian Bureau of Statistics on a quarterly basis, is a measure of the total value of all goods and services produced in Australia during a given period. The GDP is considered as the main measure of Australian economic activity. The QoQ reading compares economic activity in the reference quarter to the previous quarter. Generally, a rise in this indicator is bullish for the Australian Dollar (AUD), while a low reading is seen as bearish.

Why it matters to traders?

The Australian Bureau of Statistics (ABS) releases the Gross Domestic Product (GDP) on a quarterly basis. It is published about 65 days after the quarter ends. The indicator is closely watched, as it paints an important picture for the economy. A strong labor market, rising wages and rising private capital expenditure data are critical for the country’s improved economic performance, which in turn impacts the Reserve Bank of Australia’s (RBA) monetary policy decision and the Australian dollar. Actual figures beating estimates is considered AUD bullish, as it could prompt the RBA to tighten its monetary policy.

Author

Guillermo Alcala

FXStreet

Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.

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