RBNZ On Hold At 2.5%
The RBNZ kept the policy rate unchanged at 2.5%, but implicitly raised the prospect of a future interest rate cut if the New Zealand dollar remains elevated. The short overnight policy statement warned that continued currency strength may force the bank “to reassess the outlook for monetary policy”. Previously, only a deferral of interest rate hikes was being considered in the case of persistent currency strength, but now two-way risk has been injected into the policy language. Surprisingly, the New Zealand dollar did not weaken in response, and soon traded 30 pips higher in line with a more supportive backdrop for risk appetite. Meanwhile, FX investors continue to digest the FOMC’s latest policy announcement and forecast revisions. Upward revisions to near-term GDP growth and inflation forecasts were made, and several FOMC members brought forward their personal views on the date and pace of future tightening. But it was Fed Chair Bernanke’s dovish interpretation of FOMC opinion that left a lasting impression. Denied a boost from the Fed, it is difficult to see the dollar rally in the near term without a significant uptick in risk aversion. A better payrolls report next week would likely help, but policy support is not likely to come through until the FOMC minutes are released in three weeks’ time, or until the FOMC next meets on June 20. USDJPY followed US 10y yields lower after the press conference. Yen bears can take some solace from the fact that the ball is now in the BoJ’s court and if they deliver a bold round of additional easing on Friday, USDJPY could push towards 82.00. However, with US yields failing to sustain a rally, and risk largely driven by strong US earnings estimates, a structural move higher seems unlikely in the near term, especially if the BoJ disappoint the markets with their actions.
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UBS Investment Bank