The New Zealand dollar was poleaxed on Thursday, sliding nearly 1% against the US dollar.
It’s now lost over 2.3% from the highs seen earlier this week.
This chart helps to explain why.
Courtesy of the Commonwealth Bank’s fixed income and rates strategy team, it shows how much markets have scaled back their expectations for interest rate hikes from the Reserve Bank of New Zealand (RBNZ) following the bank’s first monetary policy meeting of the year held earlier today.
The dotted red line was market pricing for the RBNZ’s overnight cash rate on January 4, and the pink line is where it sits today.
It’s fallen dramatically, courtesy of the RBNZ’s updated forecasts (shown with the blue line) which don’t have a rate increase until late 2019 at the earliest. Many, before today’s meeting, though the first increase could come as soon as the end of this year.
“The market has shaved a full rate hike off the profile, and still remains well above the RBNZ, and our expectations,” said strategists at the CBA.
The CBA’s forecasts are shown with the dotted black line.
While not as dovish as the view communicated by the RBNZ, the CBA says that calls for a rate hike late this year or in early 2018 are “premature”.
“We believe any discussion of rate hikes needs to be placed into the second half of 2018,” it says. “It is hard to call for 2018 rate hikes, when inflation isn’t expected to return to target until mid-2019.”
Here’s the 5-minute NZD/USD chart, showing the effect the scaling back of rate hike expectations has had.