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10 Dec 2015
RBNZ wastes its ammunition - UBS
FXStreet (Córdoba) - The Reserve Bank of New Zealand (RBNZ) cut rates by another 25 basis points, taking the cash rate to 2.5%. The UBS analyst team notes that judging by the Kiwi dollar's post-decision action alone, one could assume no cut was made.
Key Quotes
“The NZDUSD cross rallied 1.5%, as a hard-line easing bias was replaced with a softer tone, which clearly gave participants the green light for currency gains. In our opinion, the currency reaction indicates that the RBNZ made a mistake by dropping its explicit easing bias. Indeed, if this was an insurance cut in the hope of levering the inflation rate higher and the currency lower, it failed and wasted a cut.”
“At the same time, the RBNZ released an updated set of macro forecasts: in essence, it lowered inflation and raised growth expectations. It now sees growth rising gradually as dairy prices recover, helping the country's terms of trade, and easier monetary conditions supporting growth. Headline inflation is forecast to stay lower for longer; the 2% target midpoint is unlikely to be reached until 4Q17. This makes some sense given the lift in expectations for the currency's trade-weighted index (TWI), which is now 4-5% higher than projected in September.”
“While our central case for the low point of the easing cycle is 2.5%, we acknowledge that the RBNZ has left the door ajar for further easing. We see a real possibility that circumstances could evolve in such a way as to necessitate further cuts, particularly in 1H16. The RBNZ could deviate from its current path if, for example, agricultural production suffers from a worsening of drought conditions, or the TWI stays at or above its current value. Given this backdrop, we retain our bearish 12-month view on NZDUSD at 0.60. “
Key Quotes
“The NZDUSD cross rallied 1.5%, as a hard-line easing bias was replaced with a softer tone, which clearly gave participants the green light for currency gains. In our opinion, the currency reaction indicates that the RBNZ made a mistake by dropping its explicit easing bias. Indeed, if this was an insurance cut in the hope of levering the inflation rate higher and the currency lower, it failed and wasted a cut.”
“At the same time, the RBNZ released an updated set of macro forecasts: in essence, it lowered inflation and raised growth expectations. It now sees growth rising gradually as dairy prices recover, helping the country's terms of trade, and easier monetary conditions supporting growth. Headline inflation is forecast to stay lower for longer; the 2% target midpoint is unlikely to be reached until 4Q17. This makes some sense given the lift in expectations for the currency's trade-weighted index (TWI), which is now 4-5% higher than projected in September.”
“While our central case for the low point of the easing cycle is 2.5%, we acknowledge that the RBNZ has left the door ajar for further easing. We see a real possibility that circumstances could evolve in such a way as to necessitate further cuts, particularly in 1H16. The RBNZ could deviate from its current path if, for example, agricultural production suffers from a worsening of drought conditions, or the TWI stays at or above its current value. Given this backdrop, we retain our bearish 12-month view on NZDUSD at 0.60. “