US Dollar to New Zealand Dollar Takes a Tumble as RBNZ Meeting Surprises Traders

Market uncertainty about how US tax reform plans will progress, as well as a surprisingly optimistic tone from the Reserve Bank of New Zealand (RBNZ), has left the US Dollar to New Zealand Dollar exchange rate weaker towards the end the week.

After opening the week at the level of 1.4478, USD/NZD briefly jumped to a high of 1.4543. Since then though, the pair has been slipping and tumbled to trend near a low of 1.4331 on Thursday morning. This was the pair’s lowest level since before the new NZ government came into power.

The US Dollar has seen stronger performance in recent weeks as markets have become confident that the Federal Reserve is planning to hike US interest rates in December, and have priced this in to the ‘Greenback’.

This steady outlook for further Fed rate hikes has also helped the US Dollar to hold its ground against major rival currencies.

As November draws on though, USD traders are becoming much more focused on another thing that has kept markets optimistic recently: tax reform.

US President Donald Trump’s proposals for tax reform, which include corporate tax cuts, have excited markets for some time. Optimism that the plans could pass through Congress have supported the US Dollar.

However, in recent sessions investors have become uncertain about how successful the tax plans will be. Reports suggesting that the Republican Party could delay corporate tax cut plans by one year have also weighed heavily on the ‘Greenback’.

As the Republican Party ultimately failed to push healthcare reform plans through Congress over the summer, there is concern among traders that they will face similar obstacles with taxes.

Any signs that tax reform plans may have to be majorly scaled back, delayed, or face other considerable obstacles is likely to cause many investors to sell the US Dollar.

Analysts don’t expect the US Dollar to advance much further than it has, unless there is notable success in the tax plans.

The New Zealand Dollar easily took advantage of a slightly weaker US Dollar following Thursday’s Reserve Bank of New Zealand (RBNZ) policy decision, which was more hawkish than expected.

As expected, the bank left monetary policy frozen and indicated that it would leave policy accommodative for an extended period of time.

However, RBNZ Governor Grant Spencer’s comments largely calmed market concerns about the affects the new Labour-NZ First coalition government could have on the economy.

He stated he did not believe the government’s plans to adjust the bank mandate would have a considerable impact on the monetary policy outlook.

He also upgraded the bank’s inflation forecast, believing that it would hit RBNZ targets sooner than expected and indicated that the bank was likely to hike New Zealand’s interest rates in the second quarter of 2019, rather than the third.

Overall, the bank’s optimism about inflation and NZ employment helped to calm markets and the New Zealand Dollar returned to its best levels against the US Dollar since before the new government entered power.

Over the coming weeks, US Dollar to New Zealand Dollar exchange rate trade is likely to become increasingly focused on developments in US tax reform progress.

The US Republican Party has indicated it intends to tackle taxes in some form before the end of November, meaning US Dollar investors are likely to overlook US data in favour of tax news.

Michigan University’s November consumer sentiment survey will be published on Friday and key inflation data will be published next week.

However, with the Fed already on track to hiking US interest rates in December, these are unlikely to influence the US economic outlook or the US Dollar.

Instead, any indication that the tax plans will make it through Congress would cause a surge in US Dollar demand, while signs of the plans faltering would cause the currency to drop.

The New Zealand Dollar could continue to stabilise in the coming sessions.

A lack of notable upcoming New Zealand data, as well as the Reserve Bank of New Zealand’s (RBNZ) confidence that the new government will not have a major impact on monetary policy, is likely to restore some certainty to the NZD outlook.