AUD/NZD rallies to 1.1050, highest since August 16 after RBNZ’s 50-bps rate cut

AUD/NZD witnessed a dramatic turnaround from a one-week trough touched this Wednesday.
The RBNZ announced a 50-bps rate cut, which weighs heavily on the NZD and boosts the cross.
Disappointment over China’s stimulus update undermines the AUD and might cap further gains.

The AUD/NZD cross rebounds from a one-week low touched during the Asian session on Wednesday and the buying interest picks up pace after the Reserve Bank of New Zealand (RBNZ) announced its policy decision. Spot prices rallied to the 1.1050 area in the last hour, closer to the highest level since August 16 touched earlier this week and seem poised to appreciate further.

As was anticipated, the RBNZ lowered the Official Cash Rate (OCR) by 50 basis points (bps) to 4.75% at the conclusion of the October meeting. In the accompanying policy statement, the central bank noted that excess capacity has dampened inflation expectations, and price and wage changes are now more consistent with a low-inflation environment. This raises the possibility of more rate cuts in the coming months, which, in turn, weighs heavily on the New Zealand Dollar (NZD) and provides a goodish lift to the AUD/NZD cross.

The Australian Dollar (AUD), on the other hand, struggles to lure buyers and languishes near a multi-month low against the US Dollar (USD) amid the disappointment over China's stimulus update on Tuesday. This might hold back traders from placing aggressive bullish bets around the AUD/NZD cross and cap any further gains. That said, some follow-through buying beyond the 1.1060 area could trigger a fresh bounce of a short-covering move and set the stage for an extension of the move-up witnessed over the past two weeks or so.

Economic Indicator

RBNZ Interest Rate Decision

The Reserve Bank of New Zealand (RBNZ) announces its interest rate decision after its seven scheduled annual policy meetings. If the RBNZ is hawkish and sees inflationary pressures rising, it raises the Official Cash Rate (OCR) to bring inflation down. This is positive for the New Zealand Dollar (NZD) since higher interest rates attract more capital inflows. Likewise, if it reaches the view that inflation is too low it lowers the OCR, which tends to weaken NZD.

Why it matters to traders?

The Reserve Bank of New Zealand (RBNZ) holds monetary policy meetings seven times a year, announcing their decision on interest rates and the economic assessments that influenced their decision. The central bank offers clues on the economic outlook and future policy path, which are of high relevance for the NZD valuation. Positive economic developments and upbeat outlook could lead the RBNZ to tighten the policy by hiking interest rates, which tends to be NZD bullish. The policy announcements are usually followed by Governor Adrian Orr’s press conference.

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