RBNZ ready to take measures against strengthening currency

The Reserve Bank of New Zealand is concentrating more on the trade weighted New Zealand dollar. At present, it trades significantly above the level the central bank had assumed in its forecast in June. This signifies that there is a risk to the inflation outlook as the appreciating currency is exerting pressure on the import prices and inflation of tradable goods that are the main reasons for the central bank to miss its inflation target for more than one year. The central bank, against this background, has shown repeatedly that it does not tolerate a stronger currency and will avert an increase with the aid of rate cuts if required.

Meanwhile, the US Fed might raise rates in July and choose a more aggressive rate path than anticipated by the market currently, said Commerzbank in a research report. As a result, the US dollar is expected to strengthen and therefore make further RBNZ measures to weaken NZD obsolete, according to Commerzbank.

New Zealand’s economic outlook is expected to recover with inflation accelerating. Thus the RBNZ will be ready to tolerate a stronger NZD. Meanwhile, the EUR/NZD pair’s sideways move is expected to continue as both the central banks are expected to keep their policies on hold for some time. But as the ECB is expected to loosen policy by the end of 2016, the New Zealand economic outlook is likely to recover slowly. Therefore, the New Zealand dollar is expected to strengthen against the EUR in 2017.