The New Zealand dollar dropped today after the Reserve Bank of New Zealand made a surprise announcement of a quantitative easing program. Currently, the kiwi has trimmed its losses but is still trading below the opening level against its most-traded counterparts, with the exception of the Australian dollar. The Aussie was dragged down by bond purchases under the quantitative easing program of its own central bank.
The RBNZ made a surprise announcement that it is going to implement a Large Scale Asset Purchase programme (LSAP) of New Zealand government bonds:
The Committee has decided to implement a LSAP programme of New Zealand government bonds. The programme will purchase up to $30 billion of New Zealand government bonds, across a range of maturities, in the secondary market over the next 12 months. The programme aims to provide further support to the economy, build confidence, and keep interest rates on government bonds low.
Of course, the move was a response to the threat of the coronavirus pandemic:
The negative economic implications of the coronavirus outbreak have continued to intensify. The Committee agreed that further monetary stimulus is needed to meet its inflation and employment objectives.
The central bank elaborated further on the pandemic’s impact on the New Zealand economy:
The severity of the impacts on the New Zealand economy has increased. Weaker global activity is affecting the economy through a range of channels, not just reduced trade. Domestic measures to contain the outbreak of the virus are also reducing economic activity. Employment and inflation are expected to fall relative to their targets in the near term.
The RBNZ has already made a move to stimulate the economy, announcing an emergency 75% interest rate cut last Monday. The problem is that longer-term interest rates rose due to risk aversion, muting the impact of the cut on retail interest rates. The statement explained:
In addition, financial conditions have tightened unnecessarily over the past week, reducing the impact of the low OCR on achieving the MPCâs mandate. Heightened risk aversion has caused a rise in interest rates on long-term New Zealand government bonds and the cost of bank funding.
Analysts speculate that the central bank may implement additional stimulus measures if the crisis persists but it is more likely to use unconventional measures, refraining from “zero interest rates” policy.
NZD/USD was down from 0.5676 to 0.5588 intraday but has bounced to 0.5672 as of 6:39 GMT today. EUR/NZD was at about 1.8955 after rallying from 1.8828 to 1.9089 earlier. NZD/JPY declined from 62.89 to 62.22 but has bounced from the daily minimum of 61.78.
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