RBNZ cut the OCR by 25bp to 3.00%

The RBNZ's OCR Review this morning cut the OCR by 25bp to 3.00%, and said more easing was likely.

Westpac Research notes:

The crucial guidance paragraph read: "A reduction in the OCR is warranted by the softening in the economic outlook and low inflation. At this point, some further easing seems likely." This is slightly more dovish language than June's : "We expect further easing may be appropriate. This will depend on the emerging data.", but not as strong as the market was hoping for.

The previous warning about the high NZD exchange rate was repeated in different words, making a side-by-side comparison difficult: "The New Zealand dollar has declined significantly since April and, along with lower interest rates, has led to an easing in monetary conditions. 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." This compares with June's: "With the fall in commodity prices and the expected weakening in demand, the exchange rate has declined from its recent peak in April, but remains overvalued. A further significant downward adjustment is justified. In light of the forecast deterioration in the current account balance, such an exchange rate adjustment is needed to put New Zealand's net external position on a more sustainable path." The dropping of the explicit reference to being "overvalued" will probably have disappointed the market.

Given market positioning was very short the NZD and very received in swaps, the reactions reflected disappointment the language was not strong enough regarding the currency and forward guidance, NZD/USD rising from 0.6585 to 0.6647, AUD/NZD falling from 1.1200 to to 1.1077, the 2yr swap rate rising from 2.87% to 2.92%, and the 10yr swap rate rising from 3.74% to 3.75%.

Looking ahead, we expect these reactions may be sustained overnight as speculative positions are rebalanced further. NZD/USD targets a test of 0.6555 resistance, and AUD/NZD should head towards 1.1020 support, The 2yr should gravitate towards 2.95%, while the 10yr should be less affected and should remain below 3.80%.