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EUR NZD Exchange Rate Surges on Reserve Bank of New Zealand Caution

  • EUR NZD Exchange Rate Reaches 1.61 – Best levels since May
  • RBNZ Takes Cautious Tone – Notes that New Zealand Dollar is too strong
  • EUR Forecast: German Inflation Ahead – Strong inflation could support ECB bets
  • NZD Forecast: Retail Sales Next Week – As well as August’s second dairy auction

Low demand for risk-correlated currencies and a cautious Reserve Bank of New Zealand (RBNZ) have led to big gains for the EUR NZD exchange rate this week. The pair could continue to climb, as the RBNZ has noted the New Zealand Dollar is too strong.

EUR NZD began the week trending at 1.5882 and has since gained over two cents in value. Today the pair has hit a high of 1.6166 – its best level since May. The pair continued to trend above the level of 1.61 due to ‘Kiwi’ weakness.

Euro (EUR) Sturdy on Solid Italian Data

The Euro has held up well, easily advancing against weakening currencies like the New Zealand Dollar.

The past week’s Eurozone data has been mixed overall and Germany’s June trade report disappointed on Tuesday.

However, since then some solid Italian data from June has been published, helping the shared currency to hold its ground.

Yesterday’s Italian industrial production results beat expectations. Monthly industrial production improved from 0.7% to 1.1% despite being forecast to slow to 0.2%.

The yearly print impressed too, rising to 5.3% well above the projected 3.4%, though the previous figure was revised slightly lower from 2.8% to 2.7%.

Italy’s trade balance data from June beat expectations as the nation’s surplus rose to €4.50b.

Euro traders have also been encouraged by a new Reuters poll of 50 economists, where just over half of those polled believe the bank is more likely to announce its plans for quantitative easing (QE) in September than October.

According to Elwin De Groot, senior market economist from Rabobank;

‘The ECB has flagged ‘autumn’ as the period in which they will decide on the asset purchase program,

We believe this means that the Governing Council will outline the intentions it has beyond this year in September or possibly October, whilst leaving the December meeting for any details, such as the exact amount of the initial adjustment.’

Ongoing speculation that the ECB could become more hawkish in the coming months is giving the Euro strong support.

However, concerns remain that if Eurozone inflation remains weak the bank could extend its QE program again instead.

New Zealand Dollar (NZD) Sold on RBNZ Decision

The Reserve Bank of New Zealand (RBNZ) left monetary policy on hold at its lowest levels on record this week, as investors expected.

However, the bank took a notably cautious tone which led to a New Zealand Dollar selloff once investors had digested the news.

In reaction to recently poor New Zealand data, the bank announced it was unlikely to hike NZ interest rates for another two years.

RBNZ Governor Graeme Wheeler also commented on the persistent strength of the New Zealand Dollar, saying that it would need to become weaker to ‘increase tradables inflation and help deliver more balanced growth’.

Despite the bank’s cautious tone, markets were initially surprised as they had expected the RBNZ to be even more dovish. According to Dominick Stephens from Westpac bank;

‘While the basic tone of the Monetary Policy Statement was as expected, we were a little surprised that the RBNZ’s reaction to recent weaker data was so muted,

Markets were primed for something slightly more dovish.’

As a result, the New Zealand Dollar briefly saw a boost in demand during Thursday’s Asian session. However, EUR NZD surged during the European session as investors sold the overvalued ‘Kiwi’ after all.

EUR NZD Forecast: German Inflation in Focus

Friday will see the publication of the week’s most influential Eurozone ecostats, as July’s final inflation reports for Germany, France, Spain and Italy will come in.

Germany’s inflation report has the potential to be the most influential ecostats of the week for Euro trade. It is projected to improve slightly from 1.6% to 1.7% year-on-year.

If German inflation falls well short of expectations, markets will become concerned that the European Central Bank (ECB) is more likely to extend its quantitative easing (QE) program than withdraw it.

On the other hand, if German inflation impresses, the Euro could strengthen as investors speculate more hawkishness ahead from the ECB.

As for the New Zealand Dollar, it has the potential to be influenced slightly by July’s business PMI or food inflation report, both due during Friday’s Asian session.

Overall though, the Euro to New Zealand Dollar exchange rate is likely to end the week near its current highs unless German inflation disappoints.

EUR NZD Interbank Rate

At the time of writing this article, the EUR NZD exchange rate trended in the region of 1.6115. The New Zealand Dollar to Euro exchange rate traded at around 0.6200.