NZD Declines on Falling Inflation Expectations, Interest Rate Outlook

The New Zealand dollar fell against all other most-traded currencies today, even its Australian counterpart, which was rather weak itself. While deteriorating inflation expectations were one of the possible reasons for the decline, the major driver for the currency was the negative monetary policy outlook.
The Reserve Bank of New Zealand reported that inflation expectations for one year ahead declined from 1.71% in the September quarter to 1.66% in the December quarter. Expectations for two years out fell from 1.86% to 1.80%. Analysts said that the negative data solidified the case for an interest rate cut from the RBNZ.
Talking about interest rates, the central bank will announce its monetary policy decision tomorrow. The general consensus is that it will cut its main interest rate from 1% to the new record low of 0.75%. Market participants will also watch for the language of the accompanying statement and comments at the press conference, seeking for hints whether the central bank plans to cut rates even more sometime in the future. If the bank retains the phrase “there is scope for further fiscal and monetary easing if necessary” or some similar wording in the statement, it will likely have a very negative impact on the New Zealand currency.
NZD/USD dropped from 0.6356 to 0.6330 as of 19:54 GMT today. EUR/NZD gained from 1.7336 to 1.7393. AUD/NZD rallied from 1.0765 to 1.0808.

If you have any questions, comments, or opinions regarding the New Zealand Dollar, feel free to post them using the commentary form below.

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