Breakdown of the latest developments on the global exchanges
Aug 12, 2020, 7:48 AM GMT

Wary RBNZ Ramps Up its Asset Purchase Facility, Hints at Potentially Negative Rates

Wellington city cable car in New Zealand

The Monetary Policy Committee (MPC) of the Reserve Bank of New Zealand expectedly decided to maintain the Official Cash Rate unchanged in July, amidst worsening prospects for future growth and rising COVID-19 cases in the country. The underlying interest rate thus remains at its previous 0.25 per cent level.

The Committee began its monetary policy statement by saying that the Bank would be increasing its asset purchase programs in order to respond to the more unfavourable economic conditions.

The overall recovery prospects in New Zealand and also globally look tilted to the downside, which prompted the RBNZ to adopt this dovish and more accommodative monetary policy stance.

"The Monetary Policy Committee agreed to expand the Large Scale Asset Purchase (LSAP) programme up to $100 billion so as to further lower retail interest rates in order to achieve its remit. […] Reflecting a possible need for further monetary stimulus, the Committee also agreed that a package of additional monetary instruments must remain in active preparation. […] The package of further instruments includes a negative OCR supported by funding retail banks directly at near-OCR (a Funding for Lending Programme). Purchases of foreign assets also remain an option."

These admissions of the MPC have worried investors, as RBNZ's pessimistic tone concerning the fragile recovery process seems to underscore new probable downturns by the end of the year.

This will not only impede set recovery process, which began from the huge economic turmoil at the beginning of the year, but it would also affirm investors' fears that the global economy faces long, uneven, and indeed an arduous road to full stabilisation.

Meanwhile, the decision of the Committee to scale up its Large Scale Asset Purchase programme represents an ostensibly dovish monetary policy stance, which caused the New Zealand dollar to tank in the early hours of today's trading session.

This is completely inlined with our projections with regards to the next likely direction of NZDUSD's price action. MPC's hint at a potentially negative OCR in the following months is going to keep the kiwi pressured, as a negative interest rate would very likely terminate its recent bullish run.

As regards the short run, the NZDUSD sunk by 0.32 per cent immediately following the publication of RBNZ's decision. The pair broke down below the major support level at 0.65600, and the underlying bearish sentiment is now rapidly rising. This can be inferred from the Ichimoku Cloud indicator on the hourly chart below, as the cloud is now red.

The price action is currently developing a minor retracement, which could test the 0.65600 level's new role as resistance before it continues to head lower.

NZDUSD 1H Price Chart