RBNZ neutral stance good enough for kiwi

The kiwi has no choice but to flex its high yielding muscle following last night’s announcement from the Reserve Bank of New Zealand to keep the overnight rate unchanged at 3.50%, while reiterating its neutral policy stance by sticking to the phrase “rates could go up or down”.

Despite having lowered inflation forecasts. The sudden NZD spike following the statement was mainly a result of the market’s exceedingly dovish expectations.

The one-page media release ended up being more upbeat than in January. Private economists are now split as to whether the RBNZ will change rates at all this year.

RBNZ governor Wheeler had another chance to sound dovish at his parliamentary testimony, but he expressed uncertainty about whether 4.50% overnight rate (vs the current 3.50%) was considered neutral level.

It would take more than simply talk from the RBNZ in order to effectively weaken the highest yielding currency among top-traded currencies in a zero-interest rate universe, action will have to be taken, instead of merely stating an indication about easing monetary policy.

The most dovish part of the RBNZ statement was the downgrade of expectations for Q1 CPI to 0%, remaining below the lower end of the 1-3% target range until Q1 2016. Whether that requires a rate cut remains to be seen.

Aside from its yield lustre, the kiwi has been propped by recovering dairy prices and, more specifically, the rise in New Zealand’s Global Dairy Trade price index, which combines the average price of fortnightly auctions for dairy products.

The chart below highlights the positive correlation between dairy prices and the Kiwi. The fifth consecutive rise in dairy auctions was the longest positive streak in two years, a period associated with notable kiwi strength.

As long as global investors fret about negative yields, China’s falling currency exports disinflation to Europe and the US, FX speculation can no longer ignore the Kiwi.

GBP/NZD fared among the casualties of last night’s RBNZ decision as the BoE officials addressed disinflationary pressures from previous pound strength. So could the USD against NZD in the event of any dovish surprise from the Fed next week.