Governor Christian Hawkesby almost seemed to encourage NZD weakness following the August policy decision. Image: RBNZ, Pound Sterling Live.
Traders at JP Morgan spell out a bearish short-term view for NZD.
"There should be little standing in the way of a weaker NZD," says a note from the investment bank's London FX dealing desk.
The New Zealand Dollar fell in spectacular fashion on Wednesday after the Reserve Bank of New Zealand cut interest rates and indicated appetite to continue with cuts.
Markets went into the decision thinking August's cut might be the last, but the RBNZ signalled it stands ready to do more to boost the economy.
"No surprise then that Fixed Income re-priced the new OCR track while 'the bird' fell 1.2% and some of the weakness... was likely due to short-term traders taking a bet on a more hawkish outcome covering long NZD positions," says JP Morgan.
The RBNZ cut rates by 25 basis points, as per expectation, but two members of the rate-setting board broke away from peers to vote for a deeper 50bp cut.
The RBNZ said further policy decisions will be based on the nature of incoming data, but in-house economists lowered the path they expect interest rates to follow in the future, underlying the 'dovish' nature of the decision.
The New Zealand Dollar fell by a per cent on the day against the Euro, Dollar and Pound following the surprising shift in sentiment on display at the central bank.
Would the rate of depreciation of the currency worry the RBNZ? Speaking to the press following the decision, Governor Christian Hawkesby actually welcomed the negative reaction in the currency, saying that he was "comfortable" with the reaction.
Above: GBP/NZD through to a higher range.
Inflation is still expected to tick slightly higher in the near term but it is clear the RBNZ is now squarely focused on delivering more growth.
For the New Zealand Dollar, this spells a softer outlook say industry experts.
"There should be little standing in the way of a weaker NZD in the short term, especially as Hawkesby is seemingly encouraging a weaker currency," says JP Morgan.
When asked, Hawkesby confirmed that he had applied for the permanent governor role, which if confirmed would reinforce the dovish bias of the board, adds JP Morgan.
The NZ Dollar took a big lurch lower and we would have anticipated a sharp retracement if the market thought that the post-RBNZ move was knee-jerk in nature.
At the time of writing Thursday there are still no signs of appetite to retrace the move: GBP/NZD is settled near the highs at a 2.3110, EUR/NZD is trading above 2.0 and the NZD/USD is near April lows at 0.5824.