New Zealand Dollar: NZD/USD Edges Higher Following RBNZ Rate Decision

RBNZ, NZD/USD, Economic Outlook – Talking Points

•Reserve Bank of New Zealand holds its OCR at 0.25%, as expected

•NZD/USD edges higher, but policy outlook remains largely unchanged

•Economic recovery more resilient than previously forecasted

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The New Zealand Dollar shifted slightly higher following the Reserve Bank of New Zealand holding interest rates steady at 0.25% on Wednesday. Economists and investors were forecasting rates to remain unchanged this month. However, according to overnight index swaps, markets expect the central bank to drop rates into negative territory next year. Likewise, economists also anticipate the bank to move negative in 2021.

NZD/USD 15-Min Chart

Chart created with TradingView

The policy statement wasnt overly dovish compared to prior language from the central bank, perhaps explaining the move higher in NZD/USD. The RBNZ introduced a Funding for Lending Programme (FLP), which could open the door to more effective policy should the OCR go negative. However, the urgency and sense to do that seemed notably absent from policymakers. The large-scale asset purchases, up to NZD100 billion, will continue in an effort to support the economy and financial stability.

The policy statement remains unchanged regarding the economic recovery being dependent on Covid and containment efforts. Still, the RBNZ references a more resilient economy than previously expected. Economic indicators such as strong consumer spending, asset prices, and employment show a positive response from policy reaction to Covid. That said, if the pace of the current recovery holds, and Covid containment efforts are successful, we may begin to see expectations for negative rates dwindle, further boosting the New Zealand Dollar.

Written by Thomas Westwater, Analyst for DailyFX.com

Contact Thomas at @FxWestwater