The main event of the trading week ended this Asian session as the Reserve Bank of New Zealand (RBNZ) announced its monetary policy for the period ahead.
It left the official cash rate unchanged to 0.25% and agreed to continue quantitative easing via its Large Scale Asset Purchase (LSAP) program.
For NZD traders, the message came as a disappointment. After Bank of Canada (BOC) ruled out negative interest rates in a speech earlier this week, RBNZ did not signal its intention to go down that road either. All NZD pairs are down for the day so far, with NZDUSD and NZDCAD falling the steeper.
Implications of the RBNZ June 2020 Monetary Policy Statement
The market’s reaction is yet another example that we are in a new normal when it comes to responses to monetary policy decisions. Just like the COVID-19 pandemic requires economies to adapt to a new normal, with norms like social distancing, the currency market requires traders to think out of the box too.
Pre-pandemic easing measures by a central bank, or dovish messages, were viewed as bearish for the currency, creating a wave of selling on the related currency pairs part of the Forex dashboard. Also, hawkish, tightening messages and measures from a central bank, were viewed as bullish for the currency.
These days, the market considers the extent a central bank is reacting to the coronavirus pandemic as a positive sign, regardless of whether the central bank, in fact, relaxes the monetary policy. In other words, by ditching the negative interest rate rumors, the RBNZ delivered a more hawkish signal to the market. Yet, instead of rising, the NZD fell across the board.
Of course, the day is still young, and until the next monetary policy statement in August, there is a long road. Any one day move may be reversed in the upcoming days, invalidating the arguments presented in this article. However, this is a pattern which has occurred often during the COVID-19 crisis, with many currencies having the same market reaction after their respective central banks announced the monetary policy.
Moving forward, the RBNZ closely monitors the impact of the COVID-19 on the economy and stands ready to act as needed. By signaling that it will act only via the LSAP program, investors will focus on future changes in the scale of the purchases, currently sitting at $60 billion.