The Reserve Bank of New Zealand kept interest rates at 2.5% and said that inflation had moved back into its target band. It also highlighted the concerns about the global economy especially situation in Europe. Coming into the release there had been some expectation that the central bank may still hint at possible interest-rate increases, undoing the 50 basis point cut that the RBA see undertook earlier that that this year. The more hawkish bias the RBA see held in the middle of this year has now been replaced by a more cautious we see attitude.
From the Statement: As foreshadowed in the September Statement, global conditions have deteriorated. Continuing difficulties related to sovereign and bank debt in a growing number of European economies have resulted in high levels of volatility in financial markets. There has also been a softening in international economic activity, including in the Asia-Pacific region.
Annual headline inflation is estimated to have returned within the Bank's 1 to 3 percent target band in the December quarter. Underlying inflation continues to sit close to 2 percent. In addition, wage and price setting pressures have remained contained.
Given the current unusual degree of uncertainty around global conditions and the moderate pace of domestic demand, it remains prudent for now to keep the OCR on hold at 2.5 percent.
In the statement, the RBNZ dropped its reference to the need to raise the rates in the future that we saw in the previous statement. That is a dovish development for the New Zealand dollar, and the initial knee-jerk reaction was Kiwi weakness. however beyond that initial reaction, which was paired rather quickly, we see Forex markets in a consolidation mode with traders reluctant to take on positions prior to the key ECB meeting tonight and EU summit result tomorrow night.
It seems that the Reserve Bank of New Zealand will be following a more cautious path and rate hikes in the first half of 2012 are probably off the table. Depending on how the domestic economy responds to the weakness emanating from Europe as well as slowing growth in China, the RBNZ may even, down the road, consider cutting interest rates in order to ease monetary conditions. That scenario would play out only if it drags from Europe become very large.
NZD/USD - Continues Sideways Ranging Action:
The NZD/USD continued its sideways action penetrated pretty much right in the middle of the recent range following the central bank decision. We therefore continue to wait for a break either to the topside or the downside of this range and then play that breakout with the channel breakout projection ( measuring the height of the range from low to high and projecting that from the break of our key horizontal levels.
The breakout here, either to the top or to the bottom, will largely depend on what happens in Europe (the AUD/USD is in a similar set up). If the EU Summit and the ECB rate decision help to instill market confidence and we see risk-on rally the New Zealand dollar would likely break to the topside. However, if the EU Summit is a failure and we see risk aversion coming back following the weekend then the New Zealand dollar is likely to test the lows of this range and perhaps retrace its recent gains.