NZD/USD soars as central bank leaves rates unchanged

Despite expectations in the swaps market that there was at best a 50/50 chance the Reserve Bank of New Zealand (RBNZ) would continue its easing of monetary policy, traders were caught aggresively short Kiwi and rushed to cover in local market trading after the central bank held rates pat.

NZD/USD soared about 100 pips in the hour after RBNZ announced Wednesday morning in Wellington that its key official cash rate would remain steady at 1%, which is nevertheless a record low. The central bank surprised the market in August with a big 50 basis point rate cut and some traders were betting big that RBNZ would continue on that path Wednesday.

What has intervened since August, however, is a sea change for the global economic outlook, a change that took shape quickly last week after big upward revisions in US employment data from previous quite weak readings over the summer, as well as a view that the trade war might be winding down. The consensus is now no global recession vs previous consensus recession quite possible.

RBNZ officials made it quite clear they will be looking to assess the impact of the August rate cut before making any changes to monetary policy, pushing the likelihood of rate moves either up or down well into next year.

Kiwi market action

Over the previous week, traders had aggresively sold off the Kiwi, taking the currency about 150 pips lower into the rate announcement. Before rate news broke early Wedensday, NZD/USD had been aggresively pushing toward the key 63.00 support level, threatening to break through.

That move has been snuffed, and Kiwi traded as high as 64.25 in early Wellington trade, before setting back to the 63.75 level.