RBNZ unlikely to cut rates and threaten NZD lower in short term

New Zealand Dollar continues to trade well, in trade weighted terms at a six month high. Reserve Bank of New Zealand may have cut rates early in December but hinted that the easing cycle may be closed, and turned to what is NZD negative into positive.

Recent statement from RBNZ came with more threatening to NZD saying "The rise in the exchange rate is unhelpful and further depreciation would be appropriate in order to support sustainable growth", but the bank said in the same statement that it expects to acheive its policy targets at current interest rate. 

Hence there is no more credible rate cut threatening which would drive the currency lower. The wording has also been softened relative to the Oct statement. So with verbal intervention softening and the RBNZ seemingly on hold, what will drive NZD from here? 

The bank has said it "will reduce rates if circumstances warrant" and also highlighted the uncertainties. One risk is El Nino. RBNZ is not assuming a drought in its current projection and as a staff paper notes "the actual impact depend heavily on where drought occurs". 

"Its reluctance to cut means it may need to see inflation actually undershoot before considering cuts, but as exchange rate/oil effects wash out, our NZ rates team think headline inflation will remain in the bottom half of the RBNZ's 1-3% target zone", says RBC Capital Markets in a research note.