Sterling rebounds while RBNZ cuts interest rates – 23rd July 2015

Pretty much every analyst around the world expected the Reserve Bank of New Zealand to cut its official cash rate to 3% this morning and, it did. The response of investors to the Reserve Bank of New Zealand’s rate cut was rather surprising as the Kiwi Dollar strengthened by around two cents. The move was driven mainly by the gentle wording of the RBNZ announcement where where, a couple of months ago, the governor described the strength of the NZ Dollar as “unjustified and unsustainable”. Today’s statement simply said “further depreciation is necessary”.

Since Graeme Wheeler made the unjustified-and-unsustainable comment in May the Kiwi Dollar has fallen by 15% against Sterling. So, one could assume that the fall of the Kiwi is not complete but the wording of today’s statement suggest any further decline will be more sedate.

After a poor day on Tuesday, Sterling bounced back yesterday following the Monetary Policy Committee minutes, strengthening by an average of 0.6%. Whilst the MPC minutes continued to show a 9-0 majority in favour of keeping the Bank Rate at 0.5%, they revealed that a significant factor in that decision was the uncertainty surrounding the Euro. With that problem and Greece temporarily under control, investors are expecting a more hawkish tone in August. Sterling ended the day up by half a cent against the Euro and the US Dollar but it’s biggest gain was 1% on the Australian Dollar.

Today’s data calendar is flooded with retail sales numbers; there are two from the UK and one from Canada. Sterling starts the day little more than a cent short of its highest level against the Euro since November 2007, so a positive retail sales number could see fresh highs. If the Canadian figures are not an improvement on the previous month the Canadian Dollar will almost surely come under pressure.

Other data today is UK mortgage approvals, US jobless claims and Euroland consumer confidence.