Originally published by AxiTrader
Key Takeaway
The decision by the RBNZ to leave rates on hold at 1.75% this morning was utterly unremarkable. But the bank signalled clearly that it is unhappy with the level of the NZDUSD (and the TWI no doubt) and noted a fall in the exchange rate was needed.
While it's not exactly currency manipulation in signalling the New Zealand economy would benefit from a lower exchange rate the RBNZ is walking straight onto the firing range president Trump has set up for those nations which seek to use devaluation as a tool of economic growth.
He probably won't notice though.
What You Need To Know
Words are powerful. Especially when they come from a central bank with a high degree of credibility.
So when the Reserve Bank of New Zealand said this morning the Kiwi was too high foreign exchange traders got the message and sold NZD/USD and Kiwi crosses lower. That's seen the NZD/USD fall 0.7% to 0.7250, and AUDNZD rise 0.8% to 1.0527.
Of concern for the bank, and in turn the outlook for the New Zealand economy, is the tightening of financial conditions as long-term rates have risen and the Kiwi has appreciated.
On the exchange rate specifically RBNZ governor Graeme Wheeler said:
"The exchange rate remains higher than is sustainable for balanced growth and, together with low global inflation, continues to generate negative inflation in the tradables sector. A decline in the exchange rate is needed."
And that is, of course, the key.
Even though governor Wheeler says growth "has increased as expected and is steadily drawing on spare resources". And even though he also noted "the outlook remains positive, supported by ongoing accommodative monetary policy, strong population growth, increased household spending and rising construction activity". The reality is that inflation in New Zealand is still too low and growth is being negatively impacted by a tightening of financial conditions rates and the currency produce.
So the CPI will be lower than previously expected and the path of rate rise shallower and longer. As part of that the RBNZ rates will keep rates low and "accommodative for a considerable period" governor Wheeler said.
One thing worth noting is that governor Wheeler's intervention is almost perfectly timed from a technical perspective.
The Daily charts show another failed attempt to get back above the previous uptrend. And my system has gone short on today's reversal from what the RBNZ would likely have considered an eye-watering high overnight high of 0.7375.
0.7175/80 looms as the garden variety, and 38.2%, retracement target. as a first stop. Topside resistance is 0.7320/40.
Have a great day's trading