New Zealand Dollar Killed by RBNZ Rate Decision

The Reserve Bank of New Zealand decided to cut rates by an additional 50bp today to a record low of 2.5 percent, resulting in an instantaneous sell-off in the New Zealand dollar. Perhaps more telling than the rate cut itself was the RBNZ’s statements regarding the health of their economy. RBNZ Governor Alan Bollard announced that there is a real threat to inflation, as “weaker global growth and an unwarranted tightening in financial conditions” may sink the economy into a deflationary spiral. As a whole, Bollard’s comments were more dovish than many had anticipated. He cautioned that the New Zealand economy remains weak with Business and consumer sentiment suffering and employment reduced. This combination of factors may in fact warrant further rate cuts, which nonetheless will remain at low levels into late 2010. Continued monetary easing may be required to pick up the slack where fiscal stimulus left off since the government is planning to cut spending. Bollard even sets the 2.5% target rate as a ceiling for the next year in monetary action. The RBNZ Governor stills holds onto a few shreds of optimism. He is confident that financial markets are showing signs of stabilization and that progress has been made in tending to the banking sector. Even though the New Zealand economy may eventually recover like Bollard mentions, he also said that “it won’t fell like that on the street.” Don’t expect the RBNZ to follow in the footsteps of the Federal Reserve, Bank of England and Bank of Japan by taking interest rates to zero. Bollard made it clear that New Zealand is not a zero interest rate economy..
How Will the Kiwi Trade in Response to the Decision?
The New Zealand dollar completely reversed direction after the announcement of the interest rate decision. After being up by more than 150 pips, the kiwi only manages to hold on to a gain of 40. As an intermediate technical analysis, kiwi dollar faces support at the 0.5486 low placed on April 20th. After that, we have the 50% retracement of early March lows to April highs at 0.5438. In case markets should decide to change their minds and reverse direction, resistance is placed at the 23.6% retracement at 0.5725, followed by the April 6th high of about 0.5982.