The New Zealand Dollar was sold heavily overnight in response to the latest monetary policy meeting from the RBNZ.
While rates were kept unchanged, it was the heavy dovish skew to the statement which contained many changes from last time around, that rattled the kiwi.
Key quotes from the statement:
In its latest assessment, the RBNZ noted a “weaker global economic outlook” and “reduced momentum in domestic spending” as reasons why “the more likely” next move in rates is down.
Weaker Global Economy
Expanding on this, the RBNZ explained:
“The global economic outlook has continued to weaken, in particular amongst some of our key trading partners including Australia, Europe, and China. This weaker outlook has prompted central banks to ease their expected monetary policy stance, placing upwards pressure on the New Zealand Dollar”.
Weaker Domestic Growth
The statement also noted:
“Domestic growth slowed in 2018, with softness in the housing market and weak business investment contributing… We expect ongoing low-interest rates and increased government spending and investment to support economic growth over 2019”
Downside Risks Growing
Finally, the statement concluded:
“The balance of risks to this outlook has shifted to the downside. The risk of a more pronounced global downturn has increased and low business sentiment continues to weigh on domestic spending.”
However, the RBNZ did note that “on the upside, inflation could rise faster if firms pass on cost increases to prices at a greater extent”.
Pressure Mounts on The RBA
The tone of the statement marks a dramatic escalation in dovishness by the RBNZ which had been keeping a more neutral tone recently. Comments to the likelihood of a rate cut have been effective in pushing NZD lower. Indeed, they could also prompt a response from other central banks.
This new change in policy guidance comes on the back of the RBA shifting its view. Previously, the RBA had forecast that its next move in rates would be higher. However, in light of the recent worsening in global growth, it altered this view to say that a rate cut was just as likely.
It will be interesting to hear from the RBA next time around now. Following the RBNZ meeting and the subsequent rally in AUDNZD, the RBA will be closely watching.
Technical Perspective: AUDNZD Challenging Key Trendline
The higher time frame daily chart in AUDNZD shows the extent of the shift in price overnight. AUDNZD is currently undergoing its largest positive day since July 2018 (excluding the recovery rally off the flash crash lows last year). Price is currently challenging the bearish trend line from October 2018 highs. This coincides with structural resistance at the 1.0449 level. Above here, focus will be on a test of the longer-term bearish trend line from 2018 highs next. This will be ahead of the next big structural level at 1.0508, a break of which could spell the start of a broader regime change in AUDNZD.
Dropping down onto the H4 charts you can see just how sharp that move was overnight. Price spiked around 140 pips higher. If we do see any retracement from here, bulls will be looking to use a retest of the 1.0373 breakout zone as a platform for a further topside run. On the other hand, a break back below the level would likely spell the end of the upside move.