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AUD NZD Exchange Rate Rockets Higher after RBNZ Policy Meeting

August 10, 2017 - Written by John Cameron

The Australian Dollar New Zealand Dollar (AUD NZD) exchange rate surged in overnight trade on Wednesday as markets reacted poorly to the Reserve Bank of New Zealand’s (RBNZ) decision to leave interest rates unchanged in August.

New Zealand Dollar’s (NZD) Plummets as RBNZ Leaves Rates on Hold

The New Zealand Dollar nosedived against the Australian Dollar last night as the RBNZ voted to leave interest rates on hold at 1.75% at its August monetary policy decision.

While the decision was widely expected by markets ahead of the vote the ‘Kiwi’ still saw dramatic losses as the bank confirmed that interest rates were likely to ‘remain accommodative for a considerable period’ adding that ‘numerous uncertainties remain and policy may need to adjust accordingly.’

The comments were largely unchanged from its previous statement in June and appeared to be in line with suggestions from economists that rates are likely to remain on hold well into 2019.

One change the bank made to its statement however was regarding the strength of the New Zealand Dollar and its negative impact on economic growth, with the bank stating;

‘A lower New Zealand dollar is needed to increase tradables inflation and help deliver more balanced growth.’

The tone was notably more aggressive than before, with RBNZ now saying that a weaker New Zealand Dollar was ‘needed’ rather than its previous message that it ‘would help’. The bank even when so far as to indicate that it could intervene in foreign exchange market, something that it has historically avoided.

However after recent speculation that the bank may be seeking to cut rates in the near future to bolster inflation, investors were relieved to hear that the RBNZ does not believe this is necessary.

RBNZ Governor Graeme Wheeler said;

‘At the moment we don't feel that (a cut) is needed in order to get inflation back to the mid-point over time.’

Australian Dollar (AUD) Pressured by Potential Slump in Construction Activity

Meanwhile the Australian Dollar’s advance this morning was slowed slightly by reports that the recent construction boom is Australia could come to a swift end over the coming years.

Market analyst and economic forecaster, BIS Oxford Economics is predicting that Australia’s residential construction sector could soon go bust as it forecasts a 31% decline in activity over the next three years.

BIS economic forecast a particularly strong fall in the building of new high density apartments, where it suggests the slump could be closer to 50%.

Adrian Hart, Associate Director of Construction, Maintenance and Mining at BIS Oxford Economics said;

‘Overall the slump will be similar in percentage terms to the residential downturns in the mid-1990s and the introduction of the GST in 2000-01.’

‘Over the next two years, the fall in residential building starts will accelerate sharply, particularly in the investor-driven apartments segment, as supply catches up to underlying demand.’

BIS economics is not the only one with such a gloomy outlook for Australia’s building sector as earlier this year Australia’s Housing Industry Association (HIA) suggested that new residential building projects would slide significantly in the 2018/19 financial year after reaching a record high in 2015/16.

AUD NZD Forecast: New Zealand Dollar to Rally on Business PMI?

Looking ahead the AUD NZD exchange rate may be forced to cede some of its recent gains later this evening as New Zealand releases its latest Business PMI, with analysts forecasting that the index will report a rebound in manufacturing activity last month after slumping in June.

Meanwhile AUD investors are likely to look to next week for the next indication of movement in the Australia Dollar, when the Reserve Bank of Australia releases the minutes from its latest policy meeting on Tuesday.

Current Interbank Exchange Rates

At the time of writing the AUD NZD exchange rate was trending around 1.0837 and the NZD AUD exchange rate was trending around 0.9223.

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