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The Week Ahead in FX Markets – RBNZ Cut’s OCR to 0.25% | NZD Falls into the 0.59’s

Published March 16, 2020

By Phil Lynch

The RBNZ have this morning cut the OCR by 75 basis points to a record low of 0.25%, and the New Zealand dollar has dipped into the 0.59’s for the first time since May 2009. During the heart of the Global Financial Crisis, the NZD/USD dropped to a low of 0.4890 (March of 2009).

The RBNZ has also signalled that they will hold the cash rate at 0.25% for at least 12-months, and that if further monetary policy relief is required, that the preferred option is ‘large scale asset purchases’ – our own form of starting up the money printing machines.

Further to this, the RBNZ has announced a 12-month delay to the implementation of their increased banking capital requirements, in order to support credit availability. It is fair to say the RBNZ is doing almost everything they can to support the economy – but the consensus is that these moves alone will merely scratch the surface.

Our Q4 GDP data released this week will be irrelevant now. The main event will be the Government’s fiscal stimulus announcement, due out tomorrow. The announcement is expected to be a multi-billion-dollar investment in the New Zealand economy, with our key export industries like tourism expected to get the largest piece of the pie. Inevitably there will be people and businesses that miss out. Another important announcement will be the GDT Dairy Auction on Wednesday morning, which is expected to take a huge hit.

Outside of New Zealand the major market event will be the scheduled Federal Reserve Rate Decision on Thursday morning, where we can expect around a 1.00% drop in rates.

This morning I share this piece from Roy Agostino, one of our Senior Relationship Managers in Sydney.

Uncertainty (noun): the feeling of not being sure what will happen in the future.

The RBA’s deputy governor, Guy Debelle in a speech last week probably best summed up the Markets assessment of COVID-19 and its consequences by saying:

“The virus is going to have a material economic impact but it is not clear how large that will be. That makes it difficult for the market to reprice financial assets”.

Or put less diplomatically, the RBA is saying that they have little idea on what will happen. And neither does the Market, hence the fear created by the uncertainty surrounding the coronavirus.

Two unanswerable questions are driving volatility:

  • How bad is this going to get?
  • How long before normal business activity will resume?

The longer the uncertainty remains the more volatile Markets will be. Volatility, as measured by the VIX (Fear) Index already rivals GFC levels! (see chart below):


To put some numbers around last week’s activity (and these are just a few):

  • The AUD/USD closed down 7% (at 0.6182 when New York closed on Friday)
  • The NZD/USD closed down 5% (at 0.6057)
  • The ASX/200 suffered its worst fall since the GFC – not once but twice! It was down 7.3% last Monday, then lost 7.4% on Thursday
  • The DOW fell by 10% on Thursday – its worst single day fall since the 1987 ‘Black Monday’ crash
  • The US Federal Reserve provided US$1.5 trillion of liquidity into US short term money markets to ensure their financial system didn’t seize up

None-the-less manage FX risk by:

  • Having a plan that aligns to your Business needs and objectives &
  • Using the volatility to your advantage – by leaving Market watch orders and/or looking at Option structures

To quote Hunter S Thompson in Fear and Loathing in Las Vegas:

“Buy the ticket, take the ride”.