The New Zealand Dollar is trading lower but clawing back some of its earlier losses after the Reserve Bank of New Zealand (RBNZ) held its official cash rate at 0.25% in a widely expected decision on Wednesday, as data suggested the economic hit from the corona virus was less severe than initially feared.
Economists in a Reuters poll had unanimously expected the RBNZ to hold rates. The bank also retained its large scale asset purchase (LSAP) programme at as much as NZ$100 billion ($66.32 billion).
At 03:15 GMT, the NZD/USD is trading .6615, down 0.0018 or -0.28%. The low of the session is .6599.
Policymakers also warned monetary policy may need to provide significant economic support for a long time as the world grapples with the coronavirus pandemic.
Although the initial response to the RBNZ announcements was to the upside, traders should not be fooled. This move is likely being fueled by profit-taking since the news has probably been baked into the market since the NZD/USD hit a multi-year high at .6798 on September 18.
Furthermore, the RBNZ may have struck a dovish note when it said further stimulus may be needed and it was prepared to use additional tools like a Funding for Lending Programme (FLP), a negative OCR, and purchases of foreign assets.
“Members agreed that monetary policy will need to provide significant economic support for a long time to come to meet the inflation and employment remit, and promote financial stability,” RBNZ policymakers said in a post-meeting statement.
This was the fourth time the RBNZ has held rates this year, after stunning markets with a 75 basis points cut in an emergency meeting in March as COVID-19 broke out across New Zealand.
Recent Economic Data that Policymakers Considered in the Decision Process
New Zealand fell into its deepest economic recession on record in the second quarter, data showed last week.
The RBNZ also said the ongoing virus-led activity restrictions – most notably in Auckland – had also continued to dampen economic activity, and business and consumer confidence.
Finally, the bank said it expects a rise in unemployment and an increase in firm closures, as weak economic conditions continue and as government spending measures like wage subsidies.
The early price action suggests the dovish RBNZ was already priced into the currency, so we wouldn’t be surprised by a technical bounce. A move like this would likely attract new short-sellers since central bank policymakers continued to set the stage for negative rates in Wednesday’s policy statement. Activity in the futures markets shows traders are anticipating a move to negative rates early next year.
Additional selling pressure could come from a stronger U.S. dollar, which is gaining strength on worries about a surge in COVID-19 cases and it negative impact on the global economic recovery.
For a look at all of today’s economic events, check out our economic calendar.
This article was originally posted on FX Empire
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