New Zealand dollar slumps after RBNZ surprises markets with a pause

what happened

The New Zealand dollar fell sharply on Wednesday and bonds rallied after the Reserve Bank of New Zealand skipped a rate hike that markets had almost fully priced in. The official cash rate stayed at 2.75%, but the central bank signalled that further tightening would come at some point, with the timing still uncertain. The committee voted 4-3 to hold, and Governor Anna Breman repeatedly stressed that more increases would be needed.

The kiwi slid 1.2% against the US dollar to 0.5607, and short-term swap rates dropped 10 basis points. The Australian dollar rose about 2% against its New Zealand counterpart, reaching 1.2602, its highest level since early 2013. Against the greenback, the Aussie barely moved, at 0.7034.

The gap with Australia widened after, according to Reuters, core inflation there rose 1% in the third quarter, pushing the annual pace to a two-year high of 3.7%. RBA Governor Michele Bullock called inflation far too high, and markets now put the odds of a quarter-point hike at the November 3 meeting at 88%.

why it matters

The RBNZ decision matters for the regional currency market because the gap between Australian and New Zealand central bank expectations pushes capital flows toward the Australian dollar. Hot inflation data in Australia has also made the outlook for rates there tighter than in New Zealand.

market impact

NZD and NZ bonds: the RBNZ pause weighs on the kiwi and supports bonds; AUD/NZD rises.

• ▼New Zealand dollar pressure down — the unexpected rate pause and cautious signal reduce the currency's appeal
• ▲AUD/NZD pressure up — the Australian dollar gains from a tougher RBA stance amid high inflation
• ▲New Zealand government bonds pressure up — expectations of slower rate increases support bond prices

tags

instruments