RBNZ's surprise 50bp rate cut sends NZD to 7-week low

RBNZ cuts official cash rate

The Reserve Bank of New Zealand (RBNZ) has cut its official cash rate (OCR) today by a jumbo 50 basis points (bps) to 4.75%, following the lead set by the Federal Reserve (Fed) last month. In response, the New Zealand dollar has hit a seven-week low.

Surprise rate cut in August

At its last meeting in August, the RBNZ surprised markets by cutting the OCR by 25 bps to 5.25%, marking its first interest rate cut since March 2020. This unexpected move, fully backed by the Committee, was deemed "not a difficult decision" by Governor Orr, emphasising a "measured approach" and a data-dependent strategy.

Since then, economic data has been subdued. Gross domestic product (GDP) contracted by 0.2% for the second quarter (Q2) 2024, which was better than the -0.5% expected. Upcoming third quarter (Q3) 2024 headline inflation (16 October) is expected to be 2.2% year-on-year (YoY), slightly below the RBNZ's August Monetary Policy Statement (MPS) forecast of 2.3% YoY.

Confidence in inflation control

In today’s RBNZ decision statement, it was noted that members are confident that inflation has returned to the target band and is expected to remain there. "The Committee assesses headline consumer price inflation to be within its 1 to 3 percent target band in the September 2024 quarter and to remain around the midpoint in the medium term."

Debating the rate cut size

The Committee discussed the benefits of a 25 bp cut versus a 50 bp cut before agreeing that a 50 bp cut was “most consistent with the Committee’s mandate of maintaining low and stable inflation, while seeking to avoid unnecessary instability in output, employment, interest rates, and the exchange rate.”

Dovish forward guidance

While today's meeting did not provide updated forecasts and wasn't accompanied by a press conference, the forward guidance in the decision statement sounded dovish, providing the RBNZ with the flexibility to continue cutting rates into the year-end.

“The Committee agreed that the economic environment provided scope to further ease the level of monetary policy restrictiveness, consistent with its mandate of low and stable inflation.”

The rates market has 40 bps of rate cuts priced for the RBNZ’s next meeting on 27 November, which suggests another 50 bp rate cut is likely before year-end, taking the OCR to 4.25%.

NZD/USD technical analysis

The NZD/USD has fallen over 4% in just seven trading sessions this month after striking a high of 0.6379 on the last day of September. The Kiwi dollar's fall came initially at the hands of risk aversion flows after Iran fired a volley of missiles into Iran in early October, raising Middle Eastern geopolitical tensions.

The sell-off in the NZD/USD then accelerated following the release of a firmer-than-expected US non-farm payrolls report last week, which pared back expectations of a follow-up 50 bp rate cut from the Fed in November.

The sell-off was capped off by today's jumbo 50 bp RBNZ rate cut, which saw the NZD/USD fall from 0.6130/32 to a low of 0.6095 before finding support at the 200-day moving average, coming in at 0.6098.

Looking forward, the NZD/USD must remain above the 200-day moving average at 0.6098 on a sustained basis to prevent it from taking another leg lower towards support at approximately 0.6040. On the topside, enthusiastic sellers will likely emerge in the 0.6200/20 resistance band.

• _{Source: TradingView. The figures stated are as of 9 October 2024. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}