NZ dollar yawns after Reserve Bank’s hike

RBNZ delivers 50bp hike

As advertised, the Reserve Bank of New Zealand raised rates by 0.50%, bringing the cash rate to 2.50%. The New Zealand dollar responded with a mere shrug, indicative of the move being priced in by the markets. It wasn’t all that long ago that a 50bp increase was labeled as “massive” and “super-sized”, but now such moves from central banks barely raise an eyebrow, as was the case with the RBNZ decision. With central banks raising rates fast and furiously in order to curb runaway inflation, large rate hikes have become the norm.

The RBNZ has been in an aggressive mode with its rate-hiking cycle, and there is more to come. In May, the central bank forecast a rate peak of around 4% by the end of the year, and market pricing appears to be in sync with this assessment. The Fed is also raising rates aggressively, but higher rates from the RBNZ should prevent a widening of the rate differential and support NZD/USD.

The tightening cycle is yet to bring a peak in inflation, but there are unmistakable signs that New Zealand’s economy is slowing down. Business and consumer confidence indicators point to a weakening in confidence, which could translate into lower spending in the private sector. Homeowners are paying higher mortgage rates due to the rise in rates, which has dampened the housing market.

The US releases the June inflation report later today.  The data follows on the heels of a surprisingly strong non-farm payrolls report, which could signal a further acceleration in inflation. If headline CPI remains close to 9.0% YoY, and core CPI around 6%, that would cement a 75bp salvo from the Fed in late July, which would be bullish for the US dollar. Conversely, an easing in inflation would increase the chances of a 50bp move and weigh on the greenback.

NZD/USD technical

• 0.6125 is a weak support level, followed by 0.6062.

• There is resistance at 0.6189 and 0.6252.