RBNZ shift fuels NZD selling – BTMU

FXStreet (Barcelona) - Derek Halpenny, European Head of GMR at Bank of Tokyo-Mitsubishi UFJ, mentions that today’s RBNZ assistant governor’s speech signalling a dovish bias saw NZD selling which was mainly triggered by markets covering AUD/NZD shorts, but a cut by RBNZ would come as surprising.

Key Quotes

“RBNZ Assistant Governor, John McDermott, in a speech today signalled a slight shift in the stance of the RBNZ in making a comment that subdued inflation could mean that the RBNZ may need to cut the Official Cash Rate. The annual inflation rate in Q1 did fall notably from 0.8% in Q4 to just 0.1%, which was the lowest level since a bout of mild deflation in 1999.”

“Assistant Governor McDermott stated today that there is some RBNZ concern that businesses and households may only look at current weak price conditions and hence there was a risk that current conditions could shape expectations of inflation going forward and weak inflation could become entrenched. Still, this was only mentioned as a risk and is not the base-case assumption.”

“The lack of inflationary pressures had already seen the market shift its expectations toward the potential for an easing being the next move. This was only modestly under consideration but in that context the size of the drop in NZD/USD today is a little surprising. We suspect the scale of the move is probably more about positioning in AUD/NZD.”

“This speech has come just as the market scales back expectations of RBA easing after slightly higher than expected inflation data earlier this week. Given that AUD/NZD has failed to break parity and the decline close to parity was fuelled by monetary policy divergence expectations, the speech today has triggered a big liquidation of short AUD/NZD positions.”

“We’d be surprised though if the RBNZ was to cut and still see a greater chance of RBA action, although that prospect is diminishing.”