The Reserve Bank of New Zealand cut its main interest rate today, and such a move was in line with expectations. What was surprising is the reaction of the New Zealand dollar to the news as the currency surged after the event. Usually, interest rate cuts affect currencies very negatively.
The RBNZ slashed the Official Cash Rate by 25 basis points to 3 percent today. Governor Graeme Wheeler said in the statement that, despite the big drop of the currency, further depreciation is desirable:
While the currency depreciation will provide support to the export and import competing sectors, further depreciation is necessary given the weakness in export commodity prices.
Moreover, the Governor suggested that additional cuts of borrowing costs are probable:
At this point, some further easing seems likely.
One could assume that the kiwi would react strongly to the news, and it happened, but the reaction was completely unexpected. Apparently, market participants anticipated a more aggressive cut and a more dovish statement.
NZD/USD leaped 1.8 percent from 0.6571 to 0.6689 as of 8:58 GMT today. NZD/JPY jumped 1.7 percent from 81.57 to 82.79.
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