The Australian Dollar to New Zealand Dollar (AUD/NZD) exchange rate enjoyed significant gains today, reaching a near six-month-high after a shocking announcement from the Reserve Bank of New Zealand (RBNZ) left investors fleeing the ‘Kiwi’.
Reserve Bank of New Zealand (RBNZ) Cuts Interest Rate by a Quarter to 2.25%
After a month of gradual growth against the New Zealand Dollar, the AUD/NZD exchange rate soared to 1.1252 from 1.1073 in a matter of minutes this morning after the Reserve Bank of New Zealand (RBNZ) announced an unexpected interest rate cut.
The rate was expected to be kept at 2.50% as forecast by the central bank in December, but was cut by a quarter to a record low 2.25%. This result came as a big shock to followers of the traditionally straightforward RBNZ.
The AUD/NZD pair is currently down about -0.3%, bouncing back a little after its sudden jump. It’s currently trending in the region of 1.1210 after opening the day around 1.1049. A gradual recoil after such a steep decline in the New Zealand Dollar is anticipated as investors attempt to benefit from profit-taking.
The Australian Dollar is currently experiencing its own strength after a record hike of iron ore prices earlier this week. The price of iron ore, one of Australia’s primary exports, jumped by 18.5% in a single day.
Prices were quick to reverse this trend with a -9% drop. However, the commodity remains significantly stronger than at the start of 2016, reflecting increased demand and resulting in improved sentiment for Australia’s currency.
The New Zealand Dollar is also experiencing weakness due to poor milk commodity prices, which are down considerably from this point last year and causing concern for the RBNZ – which cites it as one of the reasons for the rate cut. As one of New Zealand’s main exports, lack of confidence in the milk industry has meant investors are looking more favourably at other, stronger commodity currencies like the ‘Aussie’.
Chinese Attempts to Stimulate Economy Keep Commodity Currencies (AUD, NZD) Strong
Despite weak Chinese data released earlier this week revealing the February trade balance to be almost half of the January balance, the People’s Bank of China (PBoC) has already shown willingness to take immediate action in stimulating the economy.
This has helped to restore investor confidence in China’s trade prospects, affecting commodity currencies like the ‘Aussie’ positively. Unfortunately, renewed faith in the commodity bloc was unsurprisingly not enough to offset the RBNZ’s interest rate cut with the New Zealand Dollar currently not benefiting from China’s action.
Many analysts predict that the PBoC is using stealth measures to stimulate the market. The State Administration of Foreign Exchange (SAFE) commented that assets of China’s sovereign wealth fund (the China Investment Corp. or CIC) were not included in the country’s FX reserves – or mentioned in data releases. Reserves are reportedly plentiful.
New Zealand still bore the brunt of China’s bearish data however, as poor Chinese data was cited as a key reason for the Reserve Bank of New Zealand’s sudden cut.
Further Rate Cuts Forecast, New Zealand Dollar (NZD) Weakness Likely to Continue
The Reserve Bank of New Zealand is expected to cut interest rates again, to 2.0%, in their next announcement and will possibly take rates even lower than that later in the year. This follows five interest rate cuts since last June and is likely to inspire a lack of confidence in the ‘Kiwi’ going forwards.
However, the New Zealand Dollar is likely to slowly regain some strength as investors attempt to profit take from the shocking news.
The potential of China taking action on their poor data is likely to help continued strength of the Australian Dollar. China also released higher-than-expected CPI data today. However, the slowing of China’s growth has been even more evident in recent months and seems likely to continue.
The Australian Dollar is also likely to rise or fall depending on how iron ore prices fluctuate after their changes in the last few days. It’s possible that prices may continue to recoil, causing the ‘Aussie’ to suffer.
The European Central Bank (ECB) is expected to announce measures to stimulate the Eurozone economy later tonight. As a vital player in the world economy, the after-effects of this could have a knock-on effect on the AUD/NZD exchange rate.
The Australian Dollar to New Zealand Dollar (AUD/NZD) exchange rate is currently trending in the region of 1.1210 while the New Zealand Dollar to Australian Dollar (NZD/AUD) exchange rate trends in the region of 0.8914.