NZD/USD Slumps as RBNZ Held Rates & Turned Less Hawkish

NZD/USD Analysis

The Reserve bank of New Zealand has been on the forefront of monetary tightening with the October 2021 lift-off that has resulted in 525 worth of rate increases. However, it has stayed on the sidelines over the past several months and kept rates at 5.5% today for fifth straight meeting. ^[1]

Policymakers toned down the hawkish rhetoric as they are no longer "wary" of price pressures and removed prior warning that rates "would likely need to increase further", if these strengthened. Instead they believe core inflation has declined and risks to the outlook "have become more balanced". Furthermore, officials are confident that the current official cash rate is "restricting demand" and trimmed that terminal OCR forecast to 5.6% (from 5.7% previously), lowering chances of further tightening. ^[2]

NZD/USD slumped as result of the RBNZ's less hawkish stance. Along with the adjustment of market expectations for a more conservative approach on removing monetary restraint by the Fed, the pair is in risk of new 2024 lows (0.6037), although further losses that towards 0.5858 have a higher degree of difficulty.

At 4.6% y/y in Q4, New Zealand headline inflation is still high and above the central bank's 1-3% target, which reiterated that interest rates need to stay at a "restrictive level for a sustained period of time" to achieve that goal. Moreover, Governor Orr dismissed any cut talk in his press conference ^[3], while the updated projections imply that this won't happen until the back-half of 2025. The US Fed on the other hand, has clearly pointed to three rate cuts within the current year.

These monetary policy dynamics and the oversold conditions as shown by the RSI, can support NZD/USD and give it the opportunity to push for new highs (0.6219). However, the next major resistance area is distant (0.6370-0.612).