Approach of US Monetary Policy Announcements Weighs on AUD/NZD Exchange Rate, but Australian Dollar Finds More Support as New Zealand Dollar Weakens ahead of RBNZ Policy Decisions
The approach of monetary policy announcements from the US is weighing on the Australian Dollar and New Zealand Dollar, with the AUD/NZD exchange rate able to hold minor gains due to the fact the Reserve Bank of New Zealand (RBNZ) is also due to announce its latest interest rate decision shortly.
Both the Australian Dollar and New Zealand Dollar are suffering today from a lack of market risk appetite ahead of the conclusion of the US Federal Open Market Committee (FOMC) monetary policy meeting.
Markets are virtually certain of a 0.25% hike to US borrowing costs, with investors having priced in odds of 94.4% that monetary stimulus will be tightened today, taking the upper bound to 1.75%.
Although today’s interest rate hike has been expected for a long time, it is the longer term outlook on monetary policy that is keeping the Australian Dollar and New Zealand Dollar on uncertain ground.
The Federal Reserve began this year expecting to hike interest rates three times, but solid economic data and the implementation of tax reforms has raised the possibility that the economy will strengthen to the point where it needs four rounds of monetary tightening to prevent overheating.
It is the possibility of US policymakers targeting a faster-than-expected rate of policy normalisation that is preventing the Australian Dollar from capitalising on the New Zealand Dollar’s weakness, instead leaving the AUD/NZD exchange rate only marginally above opening levels.
New Zealand Dollar Slips Lower as RBNZ Policy Announcements Approach; AUD/NZD Exchange Rate Gains
Markets have little expectation of changes to monetary policy from the upcoming Reserve Bank of New Zealand announcement, but uncertainty over the longer-term outlook has allowed the AUD/NZD exchange rate to inch higher.
New Zealand’s official cash rate (OCR) has been frozen at the current level of 1.75% since the 10th November 2016 monetary policy meeting, after cuts spread across the preceding 18 months took borrowing costs down from their post-financial crisis peak of 3.5%.
The upcoming meeting is unlikely to see changes to monetary policy as the RBNZ is currently being chaired by Acting Governor Grant Spencer, who is due to step aside and allow Adrian Orr to take full control of the central bank on 27th March; it would therefore be a surprise if Spencer elected to alter monetary policy just before relinquishing the helm.
According to Senior Economist at Kiwibank Jeremy Couchman, ‘With Adrian Orr taking the helm of the Bank from 27 March, there does not seem any reason for the Reserve Bank’s one-page statement to diverge too much from the February MPS policy assessment’.
TD Securities agrees, stating in a note to clients that ‘Acting RBNZ Governor Grant Spencer’s OCR Review swansong is likely to hand over a neutral-sounding playbook for incoming Governor Adrian Orr’.
AUD/NZD Exchange Rate Forecast to Weaken Unless RBNZ Sounds Unexpectedly Dovish after Monetary Policy Meeting
Because both the Australian Dollar and New Zealand Dollar are high-risk assets, they will be affected almost equally by the FOMC announcements, meaning the AUD/NZD exchange rate may not change much following the central bank’s communique.
However, there could still be notable movement for the pairing after the RBNZ monetary policy announcements, which could drastically change the outlook for the New Zealand Dollar and therefore push the AUD/NZD exchange rate higher (if policymakers appear more dovish than expected) or see the Australian Dollar sink into negative territory (if policymakers prove unexpectedly hawkish).