The RBNZ is never caught on the hop, from Westpac:
The RBNZ’s OCR Review this morning kept the OCR unchanged at 3.50% as expected, but shifted from an explicit tightening bias to an explicit neutral bias with an allowance for rate cuts – a dovish market surprise.
The most important change, from the market’s point of view, was a rewording of the policy outlook paragraph, which is the final one in the press release. The sentence “Some further increase in the OCR is expected to be required at a later stage.” was dropped, and effectively replaced by “In the current circumstances, we expect to keep the OCR on hold for some time. Future interest rate adjustments, either up or down, will depend on the emerging flow of economic data”. The explicit allowance for the OCR to decrease is more dovish than the purely neutral bias the market had expected.
The previous warning about the high NZD exchange rate was repeated: “we believe the exchange rate remains unjustified in terms of current economic conditions, particularly export prices, and unsustainable in terms of New Zealand’s long-term economic fundamentals. We expect to see a further significant depreciation.”
Market reactions were understandably in a dovish direction. Markets had earlier priced in a 50% chance of a rate cut late this year but this new policy stance will encourage more.
NZD/USD fell from 0.7430 to 0.7365, and AUD/NZD rose from 1.0700 to 1.0769. We expect further reactions during the day ahead, there being no major historical support for NZD between 0.7370 and 0.7120. AUD/NZD now has a green light to breach 1.0800.
Interest rate markets reacted significantly, now believing there is a decent chance of a rate cut this year. The NZ 2yr swap rate fell 7bp from 3.62% to 3.55%, and should continue lower to at least 3.50% during the days ahead. The 10yr fell 5bp from 3.71% to 3.64% and will remain under downward pressure. OIS pricing now implies an 80% chance of a rate cut this year (from 50% yesterday), and there is scope for more.
And the Aussie reversed all of yesterday’s gains in a jiffy as the pressure on the RBA ratchets up:
