NZD/USD: RBNZ Keeps Rates on Hold, NZD Gains

Central bank pronouncements from New Zealand earlier and the US yesterday are presumed to strengthen the Kiwi opposite the US dollar in today’s exchanges. In his first public event as Governor of the Reserve Bank of New Zealand, Graeme Wheeler kept interest rates on hold at 2.5 percent and gave no indication of a possible rate cut in the near future. Meanwhile, the US Federal Reserve reaffirmed its commitment to continue its asset purchases until unemployment improves markedly.

RBNZ chief Wheeler kept the Official Cash Rate unchanged at 2.5 percent this month, saying that the level was appropriate for current conditions. The markets have speculated that the central bank could slash rates to spur flagging economic activity after historically low inflation figures suggested there was room to move. Slowing global growth is hurting demand for New Zealand’s exports, which make up around 30 percent of GDP. Likewise, tepid domestic demand and a high Kiwi have pushed inflation below the RBNZ’s 1 percent to 3 percent target range, recording an annual pace of 0.8 percent in the September quarter.

Despite these, Wheeler expressed a rather positive tone, saying that housing market activity is increasing as expected and that construction in Canterbury are boosting the construction sector. He also expects inflation to head back toward the middle of the target range, adding he will be keeping close eye of gauges of inflation expectations and pricing intentions. Wheeler was also more upbeat about the global economic outlook by saying that the risks appear more balanced on improving market sentiment. With the statement showing no indication that the central bank was contemplating easing monetary policy and quashing any speculations of a rate cut, the Kiwi is deemed to gain considerably today.

Likewise helping market sentiment was the Federal Reserve’s statement after a two-day policy meeting. The Fed provided a slightly more upbeat view of the economy but said it had decided not to scale back the aggressive steps it took last month to stimulate the recovery. The Fed said the economy has continued to expand at a moderate pace in recent months and that the Jobless Rate still remains high. On the bright side, household spending has increased more quickly. Considering the still fragile economic recovery, the Fed reiterated it will buy $40 Billion a month in government mortgage-backed securities until there are signs that job market is improving substantially. It also restated its plan to keep short-term interest rates near zero until at least mid-2015. With the Fed boosting risk sentiment, a long position favoring the commodity-linked Kiwi is advised today.

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