New Zealand Dollar Drops Sharply as RBNZ Makes a Dovish Shift

July 10, 2024 - Written by David Woodsmith

STORY LINK New Zealand Dollar Drops Sharply as RBNZ Makes a Dovish Shift

The RBNZ made a strong dovish shift in Wednesday’s meeting.

While there were no firm commitments, the language of the statement suggested cuts are coming in Q4.

The New Zealand Dollar dropped sharply and NZDUSD is –0.8%.

European stock markets are staging a recover rally on Wednesday after several days of declines in the wake of the French election. The performance table is the opposite to Tuesday when the CAC40 in France was weakest and the FTSE strongest. Ahead of the US open, CAC is +1%, the DAX in Germany is +0.75% while the FTSE is +0.6%. That’s not to say the situation in French politics is much improved – coalition talks will be drawn out and complex – but there is no immediate threat to markets.

Currencies remain stable, with the weak US dollar rally on Tuesday unwinding with an equally weak decline. GBPUSD is +0.18% while EURUSD is +0.1%. The standout currency on Wednesday is the New Zealand Dollar with a drop of –0.8% versus the USD. This comes after a surprisingly dovish RBNZ meeting.

RBNZ Shift Dovish

The RBNZ are one of the last hawkish tilting central banks. Lack of progress on disinflation has kept them from signalling cuts and there have even been times when a further hike has looked likely. Wednesday’s slight dovish shift was therefore a surprise and the New Zealand Dollar immediately dropped sharply.

While the meeting was deemed dovish, no major policy announcement were made. The RBNZ has one of the highest interest rates of G7 banks at 5.5% and Wednesday’s meeting kept this on hold. Furthermore, no cuts have been signalled and markets are undecided on whether easing will happen in the fourth quarter or will be delayed until next year.

The odds of a Q4 cut did get a boost due to some changes in communication. The very first line of the statement stated,

“Restrictive monetary policy has significantly reduced consumer price inflation, with the Committee expecting headline inflation to return to within the 1 to 3 percent target range in the second half of this year.”

There was no strong signal on whether the bank will change policy once the target range is reached, but the very last paragraph hinted rates will be “tempered.”

“The appropriate stance of monetary policy was discussed. The Committee agreed that monetary policy will need to remain restrictive. The extent of this restraint will be tempered over time consistent with the expected decline in inflation pressures.”

There were also several references to slowing in the economy and a recognition of two-sided risks. This echoes Fed Chair Powell’s comments on Tuesday and there seems to be concern creeping in among various Central Banks that restrictive rates are slowing the economy and need to be eased soon before the slowdown gets too deep. Historically, Central Banks have tended to over tighten at the end of the cycle, leading to recessions.

The RBNZ’s statement could well change expectations for cuts in Q4. It certainly looks like the bank is paving the way for a cut, and ING speculate they may even make two -

“Our forecasts included one rate cut by the RBNZ in the fourth quarter this year, but we admit today’s statement tilts the balance towards at least two (60bp are priced in by year-end). Policymakers must have looked at some convincing evidence of upcoming disinflation to change their messaging today...”

As usual, upcoming data will be key, and next week’s CPI report could either cement expectations for two cuts, or undo the dovish pricing. The “Kiwi” may stay offered until the release and NZDUSD could drop to test the 0.60 level.

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TAGS: New Zealand Dollar Forecasts