New Zealand Dollar Takes A Hit After Reports That RBNZ Is Considering An Uncommon Monetary Policy Strategy

New Zealand Dollar Takes A Hit After Reports That RBNZ Is Considering An Uncommon Monetary Policy Strategy - NZD coin
Bill Cascade   NEW 25/07/2019 00:00:00 Finance

The New Zealand dollar turned bearish on Tuesday following reports that the Reserve Bank of New Zealand (RBNZ) plans to try out an uncommon strategy in a bid to stimulate the economy through monetary policy.

The New Zealand dollar’s decline on Tuesday after the announcement about the unconventional monetary strategy by the RBNZ highlights investor response over the matter. Testing the market through a monetary strategy that is not commonly used creates a sense of uncertainty for investors, thus causing them to shy off from the New Zealand dollar/Kiwi. 

The New Zealand dollar’s performance relative to the US dollar

The bearish performance of the NZD means that the US dollar gained an edge against it, and this was evident by the bearish trend in the currency pair's performance. The currency pair hit a high of 0.6787 on Monday this week but then dropped to a low of 0.6691 on Wednesday.

NZD/USD Forex Chart

 source

The RBNZ has been relatively silent about matters related to the planned unconventional monetary policy action in a bid to avoid adverse reactions by investors.

The bank is committed to improving New Zealand’s economic interests. It slashed its benchmark interest rate in May to 1.5%, and market analysts believe that it will trim the rate further to about 1.25% in August. These measures are in response to the slowing economic growth in the country and lukewarm inflation.

“The announcement shows that the New Zealand economy is no longer immune to unconventional policy,” stated ANZ exchange rate strategist Sandeep Parekh.

Some economists believe that the cash rate will reach the 1% mark by the end of 2019. Meanwhile, analysts also believe that the RBNZ's decision to try out unconventional policies will help ease the pressure on the New Zealand dollar. The country's treasury department has also been on the lookout for measures of handling or preventing a crisis in case the traditional methods fail to work or yield expected results.

RBNZ’s strategy for the policy changes

The treasury presented a paper to Grant Robertson, New Zealand’s Finance Minister, through which the paper highlighted three potential measures that the bank might implement. 

Among those measures is adjusting the OCR to levels below the zero mark. This means that banks would end up footing the bill for holding funds, thus encouraging them to lend.

The RBNZ is however keen not to drop the rate below zero by more than 35 basis points. Treasury believes that if that were to happen, then it would create an incentive to hoard physical cash contrary to the central bank’s goal of making sure that there is money circulating in the economy. 

There are, however, concerns that such measures might not achieve the expected results, especially in a massively bearish market.

The central bank would have to use targeted fiscal policy alongside the uncommon practices to make sure that it steers the economy in the right direction. RBNZ has a program that is aimed at enhancing its readiness for such a situation. 

 

 

 

More articles

US Dollar Under Pressure On Weak Economic Data

Bill Cascade   NEW 09/10/2019 00:00:00 Forex

The US dollar is struggling for direction, having lost momentum on weak employment data. The greenback has registered impressive gains, in recent months, as other majors currencies continued to edge lower...

Buy to Open Definition, Explained in Detail with Example

Bill Cascade   NEW 08/10/2019 00:00:00 Guides

There are four types of options that are commonly used in the industry. Alongside buy to open, these include buy to close, sell to open and sell to close. Here we look at precisely what the basic definition of buy to open means, alongside offering an example of it at work. By analyzing the term further, we can provide a better understanding...

Swiss Franc Eyes Fresh Gains On Safe Haven Appeal

Bill Cascade   NEW 07/10/2019 00:00:00 Forex

The Swiss franc has lost some ground against other major currencies in recent trading sessions. For starters, it is trading at two-week lows against the Euro, which has tumbled to two-year lows in recent months. While the weakness of the Swiss franc stems from weak economic data, a bounce-back could be in the offing going forward...

Turkish Lira On The Recovery As Swedish Krona Woes Persist

Bill Cascade   NEW 06/10/2019 00:00:00 Forex

Turkey's government remains optimistic about the Lira appreciation, against the dollar, over the next three years. Economic forecasts by the finance ministry indicate the government expects the country’s economy to expand by 5% next year...

Argentines Turn To the Polls To Avert Economic Crisis And Peso Volatility

Bill Cascade   NEW 03/10/2019 00:00:00 Finance

The country is struggling with one of the highest levels of inflation at 54%. High inflation levels have affected the way of life, as prices of goods continue to rise, and small businesses struggle to remain afloat... 

Free margin - Credit