NZD/USD plummets to six-month low, below mid-0.5700s on RBNZ’s dovish 50 bps rate cut

NZD/USD meets with heavy supply in reaction to the RBNZ’s surprise 50 bps rate cut.
The RBNZ said that it remains open to further rate cuts as required to control inflation.
A softer risk tone and some follow-through USD buying also exert pressure on the pair.

Haresh Menghani FXStreet

The NZD/USD pair attracts aggressive selling for the second straight day on Wednesday and dives to its lowest level since April 11, below mid-0.5700s during the Asian session.

The Reserve Bank of New Zealand (RBNZ) decided to lower the Official Cash Rate (OCR) by 50-basis-points (bps), to 2.50% from 3.00%, compared to the broader market expectations for a 25 bps rate reduction. In the accompanying policy statement, the central bank showed readiness to cut the OCT further as required for inflation to settle sustainably near the 2% target mid-point in the medium term. The surprise jumbo rate cut, along with the dovish outlook, turns out to be a key factor weighing heavily on the New Zealand Dollar (NZD).

Apart from this, a slight deterioration in the global risk sentiment contributes to driving flows away from the perceived riskier Kiwi. The US Dollar (USD), on the other hand, gains positive traction for the third straight day and climbs to its highest level since early September. This further contributes to the NZD/USD pair's steep intraday decline and backs the case for further losses. However, bets that the US Federal Reserve (Fed) will lower borrowing costs two more times this year could act as a headwind for the USD and support spot prices.

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.

Author

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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