Safe havens leap as RBNZ releases unexpected cut

Denise Jackson

New Zealand’s central bank caused a storm in the foreign exchange markets on Tuesday after announced it would be cutting interest rates by more than the amount expected.

Traders had foreseen a cut of 25 basis points from the central bank, but when the announcement came the Bank said it would cut by 50 basis points, or 0.5%, instead.

This means that the Bank’s rate has gone from 1.5% to 1% as a result of the move.

This represents a move that is further and deeper than that of the US Federal Reserve, which last week cut rates by 25 basis points despite some suggestion that it could go as far as 50.

Perhaps the main reason that the Reserve Bank of New Zealand caused shockwaves, however, were the comments given in a speech by its governor in the aftermath of the announcement.

Adrian Orr said that there was a possibility that the Bank could move towards negative interest rates at some stage in the future, a move which is particularly dovish given that few major central banks have done this.

Whatever the exact cause, the move gave a shock to the foreign exchange markets – and it meant that there was a significant rise for assets which are popular in times of volatility, including the Japanese yen.

The two major Antipodean currencies, the Australian dollar and the New Zealand dollar, both plummeted as a result of the news.

The Kiwi dollar went down 2% in its pair with the US dollar to $0.6378. This was a bad performance for the currency, which has not been this low in this pair since the start of 2016.

However, the fall for the Australian dollar was even worse, and it went down by 1.1% to $0.6677 against its US counterpart, which represented its worst position since 2009.

The same went for the pair containing the Australian dollar and the Japanese yen. The Australian dollar was down to 70.74 against the Japanese currency, which was again its worst performance for 10 years.

The Australian dollar’s performance was partly a consequence of the currency’s close connections with China, which has seen problems in recent weeks.

China, which recently saw an historic low for its currency, the yuan, managed to move slightly upwards in the currency markets yesterday. However, it remained in the doldrums for most of the day. It has suffered significantly in recent days after US President Donald Trump said his country would both engage in further sanctions and would also refer the country to the International Monetary Fund.

There was nothing for the US dollar to boast about over the course of the day. 10-year US Treasury yields, the value of which regularly aids , went down to their lowest point for three years, reaching 1.6580%.

This came again as a result of the ongoing tensions between US and China, and perhaps also as a result of fallout from last week’s Federal Reserve decision to cut interest rates as a way of pre-empting an economic slowdown.

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Denise Jackson
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