Kiwi Turns Bearish Against The US Dollar After A Larger Than Anticipated Benchmark Rate Cut By The RBNZ
The New Zealand dollar, KIWI, has taken hit following the announcement that the Reserve Bank of New Zealand (RBNZ) slashed interest rates by a bigger margin than anticipated.
The move came as a surprise to many traders who expected the RBNZ to lower the benchmark rate within the expected 50 basis points. The New Zealand central bank decided to slash the rate to 1.00%, which is a record low.
The RBNZ decided to slash the rate more than the expected range due to the growing concerns about trade in the global economy.
The lower than expected interest rate was negatively received by investors who in turn decided to sell the KIWI, thus leading to a sharp decline of roughly 1.35% against the US dollar. The NZD/USD exchange rate dropped to 0.6411 which is the lowest level that the currency pair has hit since early 2016.
The impact of the interest rate cut is evident in the NZD/USD performance on Wednesday morning, indicating a sharp bearish movement. The currency pair traded at around 0.6419 at the time of this press.
The RBNZ revealed reasons for the steep interest rate cut
The RBNZ revealed in a statement that it decided to slash the interest rate so that it can facilitate the achievement of inflation and employment objectives. The central bank mentioned that the past year has been characterized by a slowing GPD growth rate mainly due to the increasing uncertainty and instability in global trade.
At the center of those uncertainties is the China-U.S. trade war which has dragged on longer than anticipated and shows no signs of coming to an end any time soon. The trade war seems to have taken up a new direction this week after US President announced plans to impose extra tariffs against China. The Asian country retaliated by weakening its currency, thus shifting the direction of the trade war to currency wars.
The slowing global demand has not been friendly to New Zealand exports, thus slowing down GDP growth and also affecting the country's economic performance. Nevertheless, RBNZ is convinced that increased government spending and low-interest rates will help revive demand in the future.
The recent rate slash does not mark the end of such actions by the central bank. , RBNZ Governor Orr pointed out in a conference that the central bank will implement other measures in the future if need be. This statement may have further fueled the KIWI's decline by raising concerns of more rate cuts in the future?
Will the ongoing China-US trade war continue to affect the KIWI?
Australia and New Zealand are among China's major trading partners. This means that they are also affected by the trade standoff between the U.S. and China when the Asian country's industries are characterized by slowed output due to the trade uncertainties.
China and the U.S. have been holding trade talks, but it looks like they failed to reach an agreement. This means that that the trade war will continue, and this will likely continue to affect the trade partners such as New Zealand, thus negatively affecting the KIWI.