HomeNZD Shoots Higher After the RBNZ Decision

NZD Shoots Higher After the RBNZ Decision

12 November 2020 By Mircea Vasiu

New Zealand became famous worldwide for the way it handled the COVID-19 pandemic. As a result of that, the recent elections brought a new mandate to its acclaimed Prime Minister, Jacinda Arden.

The same country is home to one of the most innovative central banks in the world – the Reserve Bank of New Zealand (RBNZ). This is the first central bank that introduced inflation targeting as its mandate, a method quickly followed by other central banks in the developed world. Since the 1970s, price stability has become the cornerstone of monetary policy.

This week, on Wednesday, the RBNZ communicated its monetary policy decision. To the surprise of many, the outcome was not as dovish as expected. As such, the New Zealand Dollar (NZD) is one of the strongest currencies so far in the trading week.

Why Is This Week’s RBNZ Decision Surprising?

When it communicates its monetary policy, the RBNZ starts with the interest rate – the OCR or Official Cash Rate. Previously, the OCR was at 0.25%, and the RBNZ decided to leave it unchanged.

While it was not a surprise per se (rarely the OCR decision is not priced), many traders wanted/hoped for a move similar to what the Reserve Bank of Australia (RBA) did. On the first Tuesday of the month, the RBA announced a new reduction in the cash rate. Moreover, it accompanied the reduction with more stimulus in the form of quantitative easing (i.e., buying government bonds to lower the yields on the curve).

However, the RBNZ did not deliver a monetary policy on the same lines as the RBA. This comes as a big surprise because the RBNZ followed closely the RBA decisions on most of its recent monetary policy announcements. After all, Australia is one of the main economic partners even if we account only for geographical proximity.

Let us not interpret that the RBNZ was hawkish. Only that the message was not as dovish as expected. As such, the AUDNZD cross pair tanked. This is one of the currency pairs difficult to trade as it has a higher spread than usual. However, the NZDUSD major is currency, one of the retail traders’ darling.

One reason for that is that the interest rate between the two currencies is somewhat similar. Hence, with no interest rate differential, the costs of carrying positions overnight are minimal. Another reason is that the NZD pairs require far less margin on any retail trading account than other currencies (e.g., GBP).

As such, those that traded the NZDUSD on the long side in the last couple of weeks noticed that the pair entered Wednesday’s decision on a bullish trend. With the RBNZ announcement, it climbed above 0.69 – reflecting the strong fundamentals and resilience of New Zealand’s economy.