The New Zealand dollar moved sharply lower against US and Australian counterparts following a highly-anticipated central bank rate decision. Reserve Bank of New Zealand Governor Alan Bollard made it fairly clear that domestic economic risks remain to the downside and did not rule out further interest rate cuts through year-end. The fact that the RBNZ remains committed to lower interest rates was less surprising than Bollard’s explicit reference to the New Zealand Dollar exchange rate. Continued NZD rallies have limited economic recovery in the export-dependent economy, and Bollard effectively implied that lower interest rates would be necessary to support growth. Though forex traders have generally proven less sensitive to interest rate developments through the global financial crisis, it remains fairly clear that much of New Zealand Dollar demand comes from yield-seeking speculators lured by comparatively high domestic interest rates. A downgrade in yield forecasts subsequently hurts the Kiwi, and forex markets made their disappointment quite clear in sending the NZDUSD sharply lower following the RBNZ commentary.
