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RBNZ shift to dovish - Westpac

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Jan 27, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Guatemala) - Imre Speizer, analyst at Westpac explained that the RBNZ's OCR Review this morning announced the OCR would remain at 2.5%, as was widely expected. "However, it did shift its policy outlook in a dovish direction. Accordingly, the NZD and NZ swap rates fell."

    Key Quotes:

    "The RBNZ’s OCR Review this morning announced the OCR would remain at 2.5%, as was widely expected. However, it did shift its policy outlook in a dovish direction. Accordingly, the NZD and NZ swap rates fell.

    The policy paragraph read: “Headline inflation is expected to increase over 2016, but take longer to reach the target range than previously expected. Monetary policy will continue to be accommodative. Some further policy easing may be required over the coming year to ensure that future average inflation settles near the middle of the target range. We will continue to watch closely the emerging flow of economic data.”. Thus, we now have an explicit and less-conditional easing bias.

    In December, the policy paragraph read: “Monetary policy needs to be accommodative to help ensure that future average inflation settles near the middle of the target range. We expect to achieve this at current interest rate settings, although the Bank will reduce rates if circumstances warrant. We will continue to watch closely the emerging flow of economic data.” This was a weak and conditional easing bias.

    The NZD exchange rate narrative was softened from December: “In recent weeks there has been some easing in financial conditions, as the New Zealand dollar exchange rate and market interest rates have declined. A further depreciation in the exchange rate is appropriate given the ongoing weakness in export prices.”. This compares with: “The New Zealand dollar has risen since August, partly reversing the depreciation that occurred from April. The rise in the exchange rate is unhelpful and further depreciation would be appropriate in order to support sustainable growth.”.

    NZD/USD fell from 0.6485 to 0.6425, slightly more than we had expected given such an outcome. That may have been due to Fonterra’s milk price forecast downgrade shortly before the RBNZ announcement. A further fall to 0.6400 would not surprise. AUD/NZD rose from 1.0850 to 1.0910, and should now settle in a higher 1.09-1.10 range, especially given yesterday’s stronger Australian inflation data.

    2yr swap rates fell from 2.65% to 2.61%, and could test 2.60% during the days ahead. The 10yr fell from 3.44% to 3.41%, leaving the 2-10yr curve at 80bp. We expect the curve to steepen slightly during the days ahead."
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