How Low Could NZD Fall?

How Low Could NZD Fall?

How Low Could NZD Fall?

The Reserve Bank of New Zealand surprised the market with a 25bp rate cut and a warning that further easing may be required. The decision to lower rates to 2.25% from 2.50% caught almost every economist and investor off guard and sent the currency spiraling lower. According to the monetary policy statement, the decision was motivated by low inflation as the central bank cut their 2016 Q1 annual inflation outlook from 1.2% to 0.4%. They also lowered their Q4 2016 annual inflation rate to 1.1% from 1.6%. The Reserve Bank now expects their 2% inflation target to be reached in the first quarter of 2018 vs. the fourth quarter of 2017. Domestic risks contributed to the decline in inflation expectations and their worry that prices will remain low for some time before recovery. China building and manufacturing sectors are also under significant stress creating a number of serious imbalances – they are clearly more worried about China than their Australian counterparts.

Technically, today’s decline in NZD/USD took the currency pair back into its previous 0.6550 to 0.6800 range. While the post RBNZ decline stopped right above the 100-day SMA, at minimum we are looking for a move to trend line resistance at 0.6625 and more likely a test of 66 cents. The last time the RBNZ surprised the market with a rate cut was in June of last year and NZD/USD dropped 500 pips. That was the first rate cut since 2011. Having lowered rates last year, today’s reduction is not as significant on a historical basis but still represents a material surprise that could eventually take NZD/USD down to 65 cents.

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