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    RBNZ derails NZDJPY’s rally

    As my colleague Matthew Weller pointed out here, the RBNZ said it was looking into ways to tighten rules around lending for residential property investors by targeting rental properties. The bank is looking at making property investment a class of its own, as opposed to the current regime that doesn’t differentiate between owner-occupiers and rental properties.

    Also, the definition of ‘investor’ appears to be under scrutiny, with the RBNZ dumping the prior criteria that defines an investor as those that own five houses or more. The new definition is unclear, but it’s likely to encompass many more people than the current criteria, thereby multiplying the effect of any restrictions on residential property investment.

    Why is this bad news for the kiwi?

    Inflation pressures are fairly lacklustre in NZ, except for house price inflation. Upward pressure on house prices was a, if not the, main reason for the RBNZ’s decision to increase the official cash rate by 100 basis points last year (from 2.5% to 3.5%). Once this threat is removed, the RBNZ can focus more on supporting the broader economy. This doesn’t necessarily mean the bank will cut the OCR, but it makes it far more likely that interest rates will remain at their present low levels for an extended period of time.

    The idea that the RBNZ will remain on hold for longer, or even cut interest rates if NZ inflation outlook worsens further, removes a major fundamental support for the NZ dollar. This was evident by a massive sell-off in the commodity currency in the last 24 hours. A collapse which brought NZDUSD around 140 pips lower at its lowest point.

    NZDJPY’s hard-won rally is being undone

    After breaking through a key resistance zone around 90.00 late last month, NZDJPY was able to quickly push above 91.00. However, the collapse of the kiwi has pushed the pair back to a sticky zone around 90.00. A sustained break here may see the sell-off continue towards the pair’s 200-day SMA. If NZDJPY can regain its footing, we will be eyeing a resistance zone around 91.15.



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