Is the NZD rally justified despite RBNZ rate cut in Dec’2015?

The Reserve Bank of New Zealand met on December 9th for its final monetary policy review for the year. Heading into the RBNZ’s monetary policy event, the markets were widely divided on whether the New Zealand Central bank would cut rates or not, given that the it is an almost certainty that the US Federal Reserve would hike rates at the meeting on December 17th.

However, the RBNZ did indeed deliver a 25 bps rate cut, bringing the overnight cash rate from 2.75% previously to 2.50%. In the monetary policy statement from the RBNZ which can be read here, the Central Bank noted that it felt justified that the current rate cut would help New Zealand’s inflation move back into the 1.0% – 3.0% target range by mid 2016. The Central bank also accepted the view that inflation will remain weak in the coming months before moving higher and that the Central bank would act if inflation continues to show signs of falling.

The RBNZ also brought out its famed verbal talk down, noting that the Kiwi’s appreciation in recent months was hurting exports in an environment where commodities continue to remain weak.

Despite the dovish statement from the RBNZ, the NZDUSD rallied after the event, closing the day on a bullish note with 1.15% gains or about 76.3 pips higher from the day before. This brings to question if the NZDUSD’s rally was justified if the currency would continue to appreciate further.

NZDUSD – Setting the context

To begin with, the Kiwi has a history of trading in the extremes even when there is lack of any clear fundamentals and the daily charts for the NZDUSD certainly reflect this.

Yesterday, December 9th, ahead of the RBNZ’s meeting, the US Dollar faced a strong sell off as the Greenback fell strongly across the board. This led to a strong surge in prices on all of the other currencies, the Kiwi included.

The chart below shows a brief timeline of the RBNZ interest rate decisions since June 2015 and you can see how prices have reacted to the news.

NZDUSD - December 9th, 2015: RBNZ Rate cut
NZDUSD – December 9th, 2015: RBNZ Rate cut

The June rate cut event was the only event where the markets did not quite expect a rate cut from the RBNZ. However, despite the fact that the markets did not price in a rate cut, NZDUSD managed to close the day higher but not before giving back all the gains a day later. Although not entirely similar, the pattern that one can see from the NZDUSD chart is that prices often tend to bounce around after the RBNZ’s interest rate decision before resuming their directional bias.

From the above, if one looks beyond the dovish rhetoric from the RBNZ’s statement one sentence that stands out is the fact that “the RBNZ expects the current easing rates at 2.50% would be sufficient to achieve the inflation target” the markets viewed this statement as being quite hawkish leading to the Kiwi’s rally. From a technical perspective however, the Kiwi is yet to regain its negative bias with scope for a decline likely unless the US Dollar starts to weaken further as the US prepares to hike rates.