GBP/NZD Tumbles on RBNZ Optimism and Easing Coronavirus Fears

Darnell Taylor
February 15, 2020

"We believe that New Zealand will be unable to avoid the effects of the novel coronavirus outbreak in China and that the likely damage to its exports and tourism sectors will force further monetary easing from the RBNZ", Fitch said. As we have a few times highlighted, predicting the duration/spread/death toll of the virus is not our expertise, but for now, we simply highlight the complacency in equity markets, which suggests investors are perhaps too sanguine about the matter and we may see another leg lower in risk-related currencies.

The bank's decision was in line with market expectations.

"Low-interest rates remain necessary to keep employment and inflation around target".

Ha said some of the forces supporting growth are the fact that monetary policy stimulus has kicked in after the RBNZ cut the official cash rate by 75 basis points past year to 1 per cent, house prices are lifting, and asset prices are lifting.

And unlike Australia where the outlook for this is clouded by the impact of the bushfires and the coronavirus, NZ's central bank is expected a rise in the pace of activity as the year goes on.

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The Reserve Bank said economic growth "is expected to accelerate over the second half of 2020", and said the outlook for the economy was brighter amid increased infrastructure investment from the government.

The Pound-to-New Zealand Dollar rate was on course for a second consecutive decline Wednesday which has taken it further back from the 2.04440 post-referendum high, which it failed to overcome for a third time last Friday.

NZD/USD attempts to retrace the decline following the US Non-Farm Payrolls (NFP) report, but the exchange rate may face a more bearish fate ahead of the Reserve Bank of New Zealand (RBNZ) meeting as the Relative Strength Index (RSI) sits in oversold territory. A lot has gone right for the RBNZ since the November Monetary Policy Statement. However, June quarter growth was revised down from 0.5% to 0.1%. Westpac Banking Corp. economists estimate the shock will reduce first-quarter economic growth to just 0.1% from a previous forecast of 0.7%, while ASB Bank projects a 0.1% contraction. The bank has pulled its forecast of an OCR cut this year.

"We assume the overall economic impact of the coronavirus outbreak in New Zealand will be of a short duration, with most of the impacts in the first half of 2020". "Growth is likely to surprise to the downside with or without the coronavirus".

Global ratings agency Standard & Poor's is forecasting that the virus - covid-19 - will shave 0.5 per cent off Australia's GDP in 2020, said Pat Gilligan, a director at Forex. It expects inflation to slow to 1.7% by early 2021 then pick up to around its 2% goal over the remainder of the forecast period.

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