Lee Hardman, Currency Analyst at MUFG, notes that the New Zealand dollar has weakened sharply overnight following the RBNZ’s unexpected decision to ease monetary policy resulting in the NZD/USD rate falling back towards support from its 200-day moving average at around 0.6630. Key Quotes “The RBNZ lowered their key policy rate by 0.25 percentage point to 2.25% and signalled strongly that further easing “may be required to ensure that future average inflation settles near the middle of their target range. The updated interest rate projections signalled that the RBNZ expects to lower their key policy rate by a further 0.25 percentage point which is more likely sooner rather than later this year. The RBNZ cited concern over the stronger than expected New Zealand dollar (the trade-weighted measure was 4% higher than projected in December), lower than expected inflation expectations which have declined materially, weaker global growth and recent weakness in dairy prices as justification for further monetary easing. The factors prompted the RBNZ to lower their outlook for inflation which is expected to rebound more gradually in the coming years. The timing of the RBNZ’s rate cut was the most surprising element given that Governor Wheeler had stated only last month that core inflation was seen as encouraging and well within the target range according to the RBNZ’s factor model. The RBNZ will be pleased with the initial market reaction as the kiwi has declined sharply although it still remains stronger than expected in December. The dovish policy signal from the RBNZ should help to dampen the scope for the kiwi to strengthen further in the near-term. The RBNZ’s heightened concern over kiwi strength stands in contrast with the lack of concern signalled yesterday by the BoC over the recent significant strengthening of the Canadian dollar. The BoC merely signalled in their policy statement that the Canadian dollar has averaged close to levels assumed in their January Monetary Policy Report. The recent rebound in the price of crude oil and shift in expectations for policy divergence between the BoC and Fed were cited as the main drivers for the rebound in the Canadian dollar. The BoC’s policy meeting yesterday was a holding operation as it awaits the release of the government’s upcoming budget. It will then incorporate the fiscal stimulus plans into its updated economic projections in April. The likelihood of looser fiscal policy is dampening expectations for further BoC monetary easing providing a more supportive environment for the Canadian dollar. Still the Canadian dollar is likely to find it more challenging to strengthen further in the near-term as it already appears to be overshooting the recent rebound in oil prices.” For more information, read our latest forex news.