Gold Bounces As NZ Dollar Picks Up On RBNZ OCR Decision

Friday, 13 March 2015, 2:57 pm
Article: Kiara Medhurst

The New Zealand dollar made a comeback against the major currencies in the Asian session on Thursday, after the Reserve Bank of New Zealand declared that it was going to hold its OCR (Official Cash Ready) steady, which was forecasted by several economists.

The OCR was kept steady at 3.50% by the RBNZ monetary board. This is the fifth consecutive month when the OCR hasn’t undergone any change by the RBNZ, which had raised it by 25 basis points in all the four meetings held before September, 2014.

As per the bank, the central forecast is in keeping with a period of stability in the OCR. The bank further stated that the “future interest rate adjustments, either up or down, will depend on the emerging flow of the economic data.”

Addressing a press conference post the announcement, the RBNZ Governor Graeme Wheeler mentioned that the current surge in the housing market has not influenced the bank’s OCR decision today.

He stated, “Our situation is quite different to those economies that have eased monetary policy or cut interest rates. The cost of capital here doesn't appear to be a major constraint for business and we still believe monetary policy is expansionary, and we've seen falls in fixed term interest rates."

He further pointed out that the decline in consumer price inflation resulting from the fall in oil prices is a relative price effect and that there was no need to counterbalance that in any way through monetary policy.

As per his statement, the global economic conditions continue to be favorable, which reflects in the high equity prices and the record-low interest rates.

He also acknowledged that the financial instability in the market has intensified since the later part of 2014, thanks to the drop in the oil prices, the US monetary policy, the persistent uncertainty about global outlook, and easing of policies by several central banks.

Speaking about the concerns related to inflation, Mr. Wheeler commented that the oil prices worldwide are 50 percent lower compared to the peaking prices in June 2014, which indicates increased demand-supply factors at work. This drop in the prices augurs well for global economic growth, but will result in further reduction of inflation in the short term, at a time when global inflation is already plummeting.

As far as the domestic economy is concerned, it was said to continue to remain robust. The reduced oil prices have led to an increase in the purchasing power of the people and lowered the cost of running a business. Factors such as employment, construction activity, housing market, immigration and monetary policy have been helpful as well.

Certain factors, however, such as the drought conditions in certain parts of New Zealand, financial consolidation, reduced revenue from the dairy industry and high exchange rate were cited as roadblocks to domestic development.

When it comes to trading with other countries, it was pointed out that the New Zealand dollar continues to stay unreasonably high and untenable at the same time, which could work against its long term economic fundamentals.

The need for a descendent correction in the real exchange rate to put New Zealand’s external accounts in a more viable position was also stressed upon.

The annual consumer price inflation is anticipated to fall in the current quarter and stay down through the rest of the year due to the high exchange rate, low global inflation, and the recent falls in petrol prices.

The need to keep a close watch on the impact of low inflation on wage and price settling, particularly in the non-trading sector was also addressed. It was mentioned that the current monetary policy would continue to work towards ensuring that inflation settles at 2 percent in the times to come.

Meanwhile, in the wake of the falling of the U.S. dollar, things seem to be looking good for gold as the metal broke an eight-day long spell of weak returns, the longest since 2009, as the dollar plummeted from a decade high. Silver, platinum and palladium gained as well.

The global head of sales at MKS Switzerland PAMP Group, Mr. Frederic Panizzutti, commented that it has been “a one-way road for both the dollar and gold, and we are probably due for a larger correction than we have had so far today.”

For those wondering how gold prices and the US dollar affect each other, when the demand for the US dollar declines, banks and investors begin putting their money in gold as it helps them secure their wealth and hedge against uncertainties. Over time, the value of gold increases.

However, when the US dollar appreciates, banks and investors divert their investments from gold to the dollar, causing gold to depreciate.

Having said that, dollar and gold may not always have an inverse relationship as several other external factors come into play.

Author Bio: Kiara Medhurst is a content strategist at My Gold Limited - New Zealand's leading precious metals merchant. When in leisure time, she loves to read books and spend time with friends and family.

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