RBNZ Keeps a 1% Official Cash Rate as Inflation Expectations Rally

The Reserve Bank of New Zealand (RBNZ) announced on Wednesday, September 25, 2019 its decision to maintain the current official cash rate, clearly showing a hawkish attitude in its public remarks. The short-term price of NZD to USD climbed over 40 pips to a weekly new height of 0.6347.

RBNZ hasn‘t observed fundamental changes in monetary policy outlook with employment at a full level and inflation kept within a target range, suggesting there’s remaining scope for more fiscal and monetary stimulus.

Inflation expectation is a key signal for observers, and the market expects that New Zealand will continue to treat sluggish inflation as a sign of down-slope economy for a while. But the latest announcement shows RBNZ expects to see inflation rate inching up towards 2% under growing stress in production capacity and business profitability as well as influences of rising importation cost and wages. This suggests inflationary pressure has rallied while economic recession is alleviated, backing the view that there wont be another interest rate cut immediately.

RBNZ is satisfied with the effect of previous interest rate cut, while the prospect of more financial stimulus on the way also helps to ease markets expectation of further interest rate cut from RBNZ.

RBNZ also underlines that as escalating geopolitical tensions and global trade frictions continue to slow down global economic growth, economy in New Zealand also faces short-term pressure. Since New Zealand‘s economy heavily depends on exportation, an aggravated global trade environment can also affect RBNZ’s expectations.

Previously-released data indicates New Zealand‘s GDP growth in the 2nd quarter, although slightly lower than in the first, had exceeded market estimation. According to a statement from Statistics New Zealand, the 2nd quarter GDP growth has been mainly driven by a 0.7% increase in the service sector production, which accounts for almost two thirds of the total. A steadying NZD supports commodity money, particularly AUD, so it’s a good idea to keep a close eye on AUD/JPY.

AUD/JPY is currently at a key reversal of 38.2% following the rising trend from August 26th to September 13th. Investors can seek opportunities to buy when the curve hits 72.80.

Daily pivot points: 72.86---73.00

S1: 72.57 R1: 73.16

S2: 72.34 R2: 73.52