NZD: More aggressive RBNZ action pushes USD higher – MUFG

According to Fritz Louw, currency analyst at MUFG Bank, the plunge of the NZD today in response to the aggressive action of the RBNZ will undoubtedly will further encourage President Trump’s thinking that the US needs to do more to counter the appreciation of the dollar.

Key Quotes

“We certainly did not expect a 50bp cut from the RBNZ and hence the near 2% drop in NZD/USD is understandable. But the surprise has had a notable impact on shaping expectations for future moves (this is exactly what we argued the ECB should have done in July) and the comments from Governor Orr that the RBNZ had plans that were well advanced on implementing unorthodox monetary easing, including negative rates have reinforced the NZD sell-off. He also dismissed the argument of caution stating that it was far better to act now rather than doing “too little too late”.”

“Given the low inflation issue in New Zealand is more about tradable inflation (0.1% in Q2 Y/Y) being too low rather than non-tradable (2.8%), it is clear the action and the guidance from Governor Orr is more geared toward foreign exchange. That is unlikely to be lost on President Trump who is set to sustain his complaints against a stronger dollar. This is especially so today given USD/CNY is higher again and the RBA tonight may be tempted to follow the RBNZ and act sooner rather than later.”

“President Trump is undoubtedly going to be frustrated but we see little that can be done. The Fed can ease further but the US dollar cannot weaken given the weakness of global growth and the responses of global central banks. The IMF is unlikely to be sympathetic either. The US dollar is overvalued but for sound fundamental reason. The NZD OIS curve now has an additional 20bps of easing priced in while the AUD OIS curve has shifted further lower today in response to the RBNZ.”