Date: 16 May 2018

Recent underperformance of the New Zealand dollar (NZDUSD) on the foreign exchange market may have owed something to last week’s comment from the Reserve Bank of New Zealand’s (RBNZ) new Governor, Adrian Orr that a weaker kiwi was a “good thing for a trading nation,” but the NZD’s performance may be more than just a passing market whim as a comparison of prevailing Australian and New Zealand policy stances perhaps illustrates. Kiwi weakness hasn’t been confined to its performance versus the USD. The NZD has also been slipping against its Australian neighbour, with AUDNZD at the higher end of its 2018 range even if the pair traded higher last year. In Australia, Reserve Bank of Australia (RBA) governor Philip Lowe said on May 4 that the Australian economy had been progressing broadly in line with the RBA’s expectations, supported by the RBA’s “current accommodative stance of monetary policy” but that “if the economy continues to perform as expected, higher interest rates are likely to be appropriate at some time. The RBNZ said in February, under governor Grant Spencer that “Monetary policy will remain accommodative for a considerable period.” Note the same use of the word ‘accommodative.”

Yet fast forward to May 9 and the latest RBNZ statement said that the best way for the RBNZ to maximise the chances of sustainable employment and the maintenance of low and stable inflation was keep NZ benchmark rates “at this expansionary level for a considerable period of time.” The word ‘expansionary’ has been deliberately inserted in place of ‘accommodative.’ The RBNZ’s emphasis on the need for an expansionary monetary policy in New Zealand arguably lends itself more to a future rate cut than a hike, even if Orr did say the direction of the next move was equally balanced. in contrast the RBA’s emphasis is on the appropriateness of its own current accommodative policy but with a view to future rate hikes. Currency markets might well conclude that the AUDNZD should stay bid.

Written by Neal Kimberley, External Currency Analyst.