NZD/USD: Kiwi to suffer from RBNZ's signal of cautious moves down the road – ANZ

The Reserve Bank of New Zealand (RBNZ) has increased borrowing costs from 0.25% to 0.50%. Markets reacted muted to the decision as a rate hike was largely priced in, with NZD/USD initially spiking, but later reversing course.

Official Cash rate raised to 0.50%

“As expected, the RBNZ raised the Official Cash Rate (OCR) 25bp to 0.50% today. The tone acknowledged downside risks and concentrated lockdown pain, but emphasised the robustness of the medium-term outlook.”

“FX markets reacted quickly, with the Kiwi spiking around 25bps higher before retreating lower. Today’s OCR increase puts another 25bps of carry on the table for the NZD. That may not sound like much, but it is important against currencies like EUR and JPY, where cash rates are still negative and likely to remain that way for some time.”

“If we do see forward expectations for the OCR adjust lower over coming weeks, that could begin to weigh on the NZD, especially against currencies like the USD and GBP, with the Fed and BoE both inching close to withdrawing stimulus.”