Meeting expectations is no longer enough to influence a currency direction. This was the response of currency traders to the Reserve Bank of New Zealand, which is struggling to meet its inflation rate target band of 1 to 3%.
The kiwi rallied by more than 1% to trade at a one-year high despite the central bank cutting its official cash rate by 25 basis points to a record low of 2%, indicating further policy easing in the near future.
Traditional monetary policy tools are clearly no longer working anymore, and governor Graeme Wheeler was not surprised by the financial market's reaction.
When we see that stimulus abroad has sent 10-year government bond yields in Japan and Germany into negative territory, and in the UK yields are hitting record lows with the same applying to the periphery of Europe, this justifies market behavior where investors are struggling to find yields.
Expectations of Fed keeping rates on hold for 2016 is another reason to blame as markets lowered their forecast for a rate hike in 2016 to less than 40%, with chances for September now standing at 9%.
In other currency news, People’s Bank of China has set the midpoint for yuan 0.4% higher against the U.S. dollar to mark the anniversary of the one-year devaluation which sent equity markets tumbling across the globe.
Since then the Chinese currency depreciated by 6.5% against the U.S. dollar, but has shown some signs of stabilization most recently. I still believe that policymakers will continue to push the currency lower to support the weakening economy, but will not repeat the same mistake they did one year ago.
Asian equity markets were mostly in red following the drop in Wall Street on Wednesday. It seems markets are taking their cue from crude prices, which fell 2.5% yesterday after data from EIA showed crude inventories rose by 1.06-million-barrel against expectations of a 1-million-barrel drop.
OPEC’s monthly report showing that Saudi Arabia’s oil production hit a record high last month didn’t help either, as renewed fears of supply glut are likely to persist into 2017. But as long as oil holds above $40 the impact on equities should be insignificant.
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