Kiwi Dollar Turns Volatile as RBNZ Announces Rate Cut

Kiwi Dollar Turns Volatile as RBNZ Announces Rate Cut
March 17, 2020

 

The New Zealand dollar declined sharply against the greenback in the Asian session Monday after the RBNZ (Reserve Bank of New Zealand) announced an unexpected rate cut while hinting at further stimulus measures to mitigate the negative impact of coronavirus on the economy. However, the release of weak New York manufacturing activity by the Federal Reserve in the US session enabled the kiwi dollar to rebound sharply.  After plummeting to a near-decade low of 0.5990, the NZD/USD pair rebounded to trade near last week’s closing level of 0.6066.

The central bank of New Zealand trimmed its benchmark interest rate by 75 basis points to 0.25% and guaranteed to leave it unchanged for the forthcoming 12 months. The bank further stated that the negative economic repercussions of the coronavirus warrant additional monetary stimulus. The bank also stated that it is on standby to carry out huge purchases of government bonds, if required.

RBNZ Governor Adrian Orr stated that the central bank is ready to take additional measures, if necessary.

Orr said, “If a further stimulus was necessary at some point, which is not the case at the moment, we would consider using our additional tools, for example, large scale asset purchases of New Zealand government bonds.”

ANZ Bank Chief Economist Sharon Zollner backed the rate cut by saying, “Immediate and sizeable action was needed, and it brings the RBNZ into the line with the actions of central banks overseas.”

The rate cut and accompanying dovish statement weakened the kiwi dollar against the greenback. However, the release of weak New York manufacturing activity by the US Fed enabled the New Zealand dollar to regain the lost ground.

In the US session yesterday, the New York Fed stated that general business conditions plummeted to -21.5 in March, from 12.90 in the earlier month. Negative reading reflects the contraction of manufacturing activity. Economists had anticipated the general business conditions index to decline, but stay positive at 5.10. The sharp decline reflected the most significant drop on record, with the index recording its lowest level since 2009.

The headline index decreased as the new orders index plunged to -9.30 in March, from a positive 22.1 in February. The shipments index plummeted to -1.70, from 18.90.

Furthermore, the number of employees index also plunged to -1.5 in March, from 6.60 in February, pointing that employment levels remained unchanged in the past month. The report also stated that the prices paid index inched down to 24.5 in March, from 25 in February. Similarly, the prices received index slumped to 10.1 from 16.7.

Going forward, the New York Fed revealed that optimism about the upcoming six-month dropped sharply, with companies turning less favorable that they were eleven years ago.

The future business conditions index declined steeply to 1.20 in March, from 22.90 in the prior month, indicating that companies no longer anticipate general business conditions to improve in the upcoming six months.

Economists at Oxford Economists stated that the data published by the New York Fed is probably the first of several indicators hinting economic slowdown due to coronavirus outbreak.

Oxford Economists issued the following statement: “We are not surprised to see the index measuring manufacturing firms’ expectations also plunge to their lowest since the financial crisis – it’s hard to expect anything other than pessimism from manufacturers given the current backdrop.”

The economists also opined that coronavirus might cause supply chaos, crush demand, and squeeze liquidity. Therefore, manufacturing is anticipated to remain sluggish in the months ahead. The weak economic data from both countries and coronavirus outbreak is expected to keep the NZD/USD pair volatile in the days ahead.

Technically, the NZD/USD pair is trading below its 50-day moving average after facing resistance at 0.6325. Additionally, the RSI indicator is also having a reading below 50. Therefore, we are anticipating the currency pair to move down in the short-term.

NZD - technical analysis - 17th March 2020

Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.

Sammy

Sammy

Sammy is our forex expert, with over 20 years experience in the financial sector, she will be keeping you up to date with the ups and downs of currencies around the world


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