NZD Falls on Interest Rate Statement

Markets have remained fairly settled late in the week, with most of the action occurring in the NZD and Pound – both currencies fell on their data releases. The Euro also moved, staging a rally on some strong German PMI figures released yesterday. The market remains in wait-and-see mode ahead of some important data next week.

The New Zealand dollar fell one and a half cents on the announcement that the RBNZ raised the overnight interest rate by 0.25% to 3.50%. The counter-intuitive reaction was partly related to the wording of the statement. The statement both suggesting that the exchange rate was too high and that following this rate increase there would be a period of assessment before future rate changes:

“Over recent months, export prices for dairy and timber have fallen, and these will reduce primary sector incomes over the coming year. With the exchange rate yet to adjust to weakening commodity prices, the level of the New Zealand dollar is unjustified and unsustainable and there is potential for a significant fall.”

“It is important that inflation expectations remain contained. Today’s move will help keep future average inflation near the 2 percent target mid-point and ensure that the economic expansion can be sustained. Encouragingly, the economy appears to be adjusting to the monetary policy tightening that has taken place since the start of the year. It is prudent that there now be a period of assessment before interest rates adjust further towards a more-neutral level.”

The market reacted negatively to the release.

The Pound also fell after the release of UK retail sales. The figure rose to 0.1% from -0.5%, however the market was expecting a higher read of 0.2%. The currency fell 80 pips after the release, reaching a low of 1.6966 overnight. UK GDP is yet to be released, and is due today – economists expect the data to be unchanged from last quarter, with a read of 0.8% quarter on quarter.

Euro PMI was fairly positive, with both German and Euro Area PMI readings showing strong expansion in the currency union. German PMI came in at 52.9 and 56.6 for the Manufacturing and Services PMI’s respectively. Any reading over 50 indicates expansion in the industry, and both numbers out of Germany indicated expansion which surpassed expectations. The Euro rallied 30 pips on the data, ending a period of weakness to settle at 1.3465 this morning.

With UK GDP and the Ifo Business Climate release today, the volatility may pick up yet, however given that next week sees a combination of US GDP, the FOMC statement and Non-Farm Payrolls, the main event may be forthcoming.

Source: Forex Market Review – NZD Falls on Rate Statement

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