Before this week began, both the Bank of Canada (BOC) and the Reserve Bank of New Zealand (RBNZ) were firmly in the hawk camp. There were those who were willing to place bets that one of these two central banks would be the first to raise interest rates. However, with the BOC pulling a 180 on its interest rate and growth forecasts, all eyes turned to the RBNZ to see if it would do the same.
As expected, the RBNZ decided to keep its baseline interest rate steady at 2.50%. No surprises here - it's been that way since March 2011!
One thing to note though, is the upbeat tone that the RBNZ had in its accompanying statement. According to RBNZ head Graeme Wheeler, business confidence and construction activity are on the rise, which indicates that GDP growth could be on its way up as well. Thing is, Wheeler also acknowledged the continued softness in the labor market, as it has yet to pick up any steam.
As for inflation, Wheeler said that it remains subdued, as it is currently sticking just below the central bank's inflation target band. Wheeler also said that the central bank will continue to monitor consumer prices and credit growth closely in order to properly align monetary policy.
The RBNZ believes that a strong currency is one of the main reasons why inflation remains at the bottom of its target range. The central bank isn't too excited about it though, as it also thinks that the expensive Kiwi is weighing on its exports industry.
This is probably why the RBNZ is stepping up its efforts to devalue its currency. You see, a recent report showed that the central bank sold 199 million USD worth of New Zealand dollars this past December in order to weaken the Kiwi, the biggest monthly sale since mid-2008. Who needs rate cuts when you can still actively intervene, right?
But judging from NZD/USD's immediate price action, it seems that the Kiwi traders are paying more attention to the RBNZ's optimism. The pair rocketed by almost 70 pips in the first hour of the release before it consolidated around a previous support area. Hey, if you had traded this report with my RBNZ Decision Trading Guide in mind, you would've made a decent amount of pips!
Now that the RBNZ's decision is over, comdoll players will turn their focus on the big ticket reports that might affect the Kiwi's price action. The NFP report and China's manufacturing PMI, for instance, could play confuzzling games with overall risk appetite. And let's not forget that major comdoll-related reports are also up for next week!