Market players had expected an interest rate hike from the Reserve Bank of New Zealand (RBNZ), but they sure didn’t expect what the central bank had added to its statements! Here are four reasons why the the currency bulls were all over the Kiwi today.
1. First rate hike in THREE years
Although the RBNZ’s decision to raise its rates from 2.50% to 2.75% was mostly priced in, it didn’t stop some traders from reacting positively to it. After all, it’s the first RBNZ rate hike since July 2010 and it tags New Zealand as one of the first developed nations to tighten its monetary policy. If you remember, the RBNZ had had to cut its rates from 3.0% down to 2.50% in 2011 after two huge earthquakes in the Canterbury region.
2. MORE rate hikes
What’s better than a rate hike? Yep, you guessed it–MORE rate hikes! In his press conference RBNZ head honcho Graeme Wheeler said that its rates will “need to rise by around 2 percentage points over the next two years.” The pace will depend on economic data, of course, but any hint of rate hikes is always good for the currency bulls.
3. Upgraded growth and inflation forecasts
Rising commodity and housing prices, rebuilding efforts in the Canterbury region, and strong domestic demand are some of the reasons why Wheeler and his gang are turning their attention to economic growth and inflation.
The central bank is now expecting consumer prices to rise by 1.9% by the end of 2014, up from its previous estimates of 1.5%. Meanwhile, inflation rate estimates for 2015 and 2016 are both at 2.1%, which is near the middle of the RBNZ’s 1%-3% target range.
The RBNZ also upgraded its GDP forecasts. Growth in 2014 is now seen at 3.0%, up from its 2.8% estimates in December. The economy is then expected to pick up by 3.0% to 3.50% in 2015 before it levels off to a 2.3% growth rate in 2017. Talk about optimism!
4. Not much worry over the Kiwi’s current levels
In an attempt to control the Kiwi’s gains Wheeler warned that the RBNZ doesn’t think that the Kiw’s current levels are “sustainable in the long run.” Unfortunately, investors had heard of the same warning in his previous statements and figured that the lack of fresh warnings meant that the central bank isn’t too serious about it.
Not surprisingly, the Kiwi was pushed higher across the board. NZD/USD and NZD/JPY shot up by as much as 100 pips during the day while the other Kiwi pairs also showed NZD dominance.
The question now is, “do the Kiwi bulls still have muscle to hustle?” Word on the streets is that the the Kiwi’s gains would have been a lot stronger had investors not price in the RBNZ’s optimism a few months back. What do you think? Is there room for more Kiwi gains?