RBNZ And The New Zealand Dollar At The Crossroads?

The New Zealand dollar slid against the US dollar after the Reserve Bank of New Zealand (RBNZ) last meeting on February 28th. During the days before the RBNZ interest rate decision, there was an open debate with some analysts suggesting that New Zealand’s central bank would keep borrowing costs on hold while others forecast a new rate hike.

Finally, the RBNZ board decided to refrain from adjusting rates but changed the narrative over the future of its monetary policy. In this article, you can read how this was done and what do analysts forecast.

RBNZ Changes Rhetoric Over Rates

Despite forecasts over an interest rate raise, the RBNZ’s board decided to keep borrowing costs on hold. In its post-meeting statement, the bank’s governing council surprised analysts as policymakers noted that the bank “remains confident that the current level of the OCR is restricting demand.”

RBNZ Governor Adrian Orr noted that the board is still concerned about the underlying inflation and added that the country’s economy faces a soft-landing scenario. Orr also mentioned that the RBNZ is more confident regarding the economy’s outlook than it was in November 2023 and forecast that central banks may have to hold rates higher than markets expect.

New Zealand Economy: Inflation Down, But Also GDP Growth

New Zealand’s parliament released its monthly economic review on February 14th that included a set of data related to the country’s economic conditions. The review noted that the economy “contracted by 0.3 percent in the September quarter, with the result weaker than market and Reserve Bank expectations,” with the country’s unemployment rate rising to 4.0% in the December quarter, although it remained the 14th lowest in the OECD out of 38 member countries.

The review points out that “annual inflation fell to 4.7% in the December 2023 quarter from 5.6% in the previous quarter. The annual inflation rate remains above the Reserve Bank’s 1 – 3 percent medium term inflation target band.” The RBNZ’s Governor Adrian Orr said that the outlook for inflation is balanced and that he was confident the current level of the OCR was restricting demand. He also stressed that the OCR needs to stay where it is in 2024 as the country’s economy is developing as anticipated.

According to Statistics New Zealand, New Zealand retail sales fell by 1.9% on a quarterly basis in the fourth quarter of 2023, marking the eighth straight quarter of decline in retail spending.

What Do Analysts Say About The New Zealand Dollar

The New Zealand Dollar (NZD) has had a strong February, emerging as the best-performing G10 currency.

ING analysts are optimistic regarding the New Zealand Dollar’s outlook against the US dollar. In a research note, they mention: “Our view that rate cuts in New Zealand won’t start before August and that the Fed should instead start cutting during the summer translates into a bullish NZD/USD profile for the rest of the year. However, external volatility can offset the positives of a hawkish RBNZ in February and favour a near-term slide to more attractive levels for longer-term bullish positioning. We see NZD/USD breaking the 0.6500 mark in 3Q24.”

Nevertheless, they don’t fail to note that “some downside risks related to the US elections and potentially negative implications for China-related sentiment may warrant a less optimistic NZD profile in 4Q24.”

ABN AMRO bank economists wrote that “we think that the central bank could wait even longer to start easing. It all depends on the inflation outlook. The central bank is close to the end of the tightening cycle, but another 25bp rate hike by the RNBZ is still possible if inflation fails to decline as quickly as expected.” The Dutch bank’s analysts suggest that “we expect a later start of the easing cycle and less rate cuts in 2024 in New Zealand compared to the Fed and the ECB. This should support the New Zealand dollar versus the US dollar and the euro. This is reflected in our NZD forecasts. NZD is due to benefit from an attractive carry for longer thanks to a more problematic disinflation path."

Commenting on the RBNZ’s decision, Kiwibank’s suggested that the possibility of a rate cut in November has now increased. “Thoughts of rate hikes have all-but evaporated, and our call for a cut in November looks a little closer. A hike would have been a mistake - the data has clearly turned, and the RBNZ boffins finally agree. What we got was a dovish tone,” they note in a report regarding the RBNZ’s monetary policy update.

Trading The New Zealand Dollar With Admirals

By opening an account with Admirals, you get access to trading the New Zealand dollar against the US dollar (NZD/USD), the British pound (GBP/NZD), the Swiss franc (NZD/CHF), the euro (EUR/NZD), the Japanese yen (NZD/JPY), the Canadian dollar (NZD/CAD).

Beginner traders should take all facts and data reports into consideration when forming their trading strategies. Trading is about experience, quick reflexes and thorough market research. Beginner traders lack the necessary experience to judge how to form or adjust their trading strategies, a handicap that is not easy to compensate.

However, brokers tend to offer educational materials such as articles and guides, webinars and other such videos that could help beginner traders delve into the world of trading and upgrade their knowledge level.

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.