28 Jan 2015
RBNZ: Dovish market surprise - Westpac
FXStreet (Bali) - Imre Speizer, FX Strategist at Westpac, shares his thoughts on the RBNZ’s OCR Review, noting that the Central Bank shifted from an explicit tightening bias to an explicit neutral bias with an allowance for rate cuts, which was a dovish market surprise, he adds.
Key Quotes
"The most important change, from the market’s point of view, was a rewording of the policy outlook paragraph, which is the final one in the press release. The sentence “Some further increase in the OCR is expected to be required at a later stage.” was dropped, and effectively replaced by “In the current circumstances, we expect to keep the OCR on hold for some time. Future interest rate adjustments, either up or down, will depend on the emerging flow of economic data”. The explicit allowance for the OCR to decrease is more dovish than the purely neutral bias the market had expected."
The previous warning about the high NZD exchange rate was repeated: “we believe the exchange rate remains unjustified in terms of current economic conditions, particularly export prices, and unsustainable in terms of New Zealand’s long-term economic fundamentals. We expect to see a further significant depreciation.”
Market reactions were understandably in a dovish direction. Markets had earlier priced in a 50% chance of a rate cut late this year but this new policy stance will encourage more.
Interest rate markets reacted significantly, now believing there is a decent chance of a rate cut this year. The NZ 2yr swap rate fell 7bp from 3.62% to 3.55%, and should continue lower to at least 3.50% during the days ahead. The 10yr fell 5bp from 3.71% to 3.64% and will remain under downward pressure. OIS pricing now implies an 80% chance of a rate cut this year (from 50% yesterday), and there is scope for more.
Key Quotes
"The most important change, from the market’s point of view, was a rewording of the policy outlook paragraph, which is the final one in the press release. The sentence “Some further increase in the OCR is expected to be required at a later stage.” was dropped, and effectively replaced by “In the current circumstances, we expect to keep the OCR on hold for some time. Future interest rate adjustments, either up or down, will depend on the emerging flow of economic data”. The explicit allowance for the OCR to decrease is more dovish than the purely neutral bias the market had expected."
The previous warning about the high NZD exchange rate was repeated: “we believe the exchange rate remains unjustified in terms of current economic conditions, particularly export prices, and unsustainable in terms of New Zealand’s long-term economic fundamentals. We expect to see a further significant depreciation.”
Market reactions were understandably in a dovish direction. Markets had earlier priced in a 50% chance of a rate cut late this year but this new policy stance will encourage more.
Interest rate markets reacted significantly, now believing there is a decent chance of a rate cut this year. The NZ 2yr swap rate fell 7bp from 3.62% to 3.55%, and should continue lower to at least 3.50% during the days ahead. The 10yr fell 5bp from 3.71% to 3.64% and will remain under downward pressure. OIS pricing now implies an 80% chance of a rate cut this year (from 50% yesterday), and there is scope for more.