RBNZ Keeps Official Cash Rate Unchanged

Thursday, 28 October 2010-10-28

Many traders were looking to the NZD/USD overnight for trading opportunities to the upside - as the Reserve Bank of New Zealand released its opinion on official cash rates. Whilst the market was expecting no change in the official cash rate (which has been at 3% for a number of months now) - there was the odd trader who was hoping to see the rate increased, so that the RBNZ could get ahead of the yield curve.

This didn't happen, and despite the lack of a sell off on announcement, the RBNZ was comfortable to keep rates exactly where they currently are. Therefore - the announcement was that no change would be made to the official cash rate in New Zealand.

So where does this now leave us? Well - it is a fair decision to mark 0.7560 (the recent NZD/USD high) as a medium term top. It would be unlikely to see a heavy rally from here, given the uncertainty of when the RBNZ will raise rates again in the economy.

Additionally, with the USD looking to have peaked out at a new low for the year, and with predictions that it will now rise amidst a barrage of buy orders which have been placed in the market - we believe that the NZD/USD currency pair will probably now head back down towards the 0.7000 figure.

Looking at the aggregate strength of the respective countries - the New Zealand economy has continued to be buoyed by positive economic news. Fonterra, the country's largest exporter - has reported that whilst the NZD/USD is quite high at present, it expect the currency pair to trade lower in the coming months. Given that this exporter pushes over $20 billion per year through the NZD/USD pair, we believe that this outlook should be considered for anyone trading in the medium to longer term.

On the US economy front, quantitative easing measures are the topic hot on most people's lips. Many investors believe that we will not see a second round of quantitative easing, or if we do - the Fed will keep very tight lipped about it.

This would make sense, given that the US central bank and the Treasury Secretary have both come out and made comments in recent times that the underlying weakness of the USD currency has reached what they believe to be a "low".

Whilst there is often a disconnect between words in a speech and actual actions in the market - we believe that the current outlook by these two significant figures and authorities is enough to confidently sum up that quantitative easing measures will be kept quiet, if used again at all.