NZD/USD breaks down ahead of RBNZ rate decision

The US dollar continued to rise broadly against other major currencies on Tuesday as higher expectations of Federal Reserve policy tightening helped to extend the dollar’s recent recovery from multi-year lows. The New Zealand dollar was just one of the many currencies that fell sharply to US dollar strength, extending the kiwi’s fall against the greenback in the wake of an inconclusive New Zealand general election that took place over this past weekend. The election saw no clear majority winner, which will prompt the eventual formation of a governing coalition and the uncertainty that comes with that. A key upcoming event this week that has the potential to impact NZD/USD further will be the Reserve Bank of New Zealand’s policy decision and rate statement scheduled for this Thursday in Wellington.

The RBNZ’s official cash rate has remained steady at a record low 1.75% since last November, when the rate was lowered by 25 basis points from the previous 2.00%. For this Thursday’s decision, the RBNZ is widely expected to keep rates steady at 1.75%, but the manner in which the central bank may signal potential future tightening could have a substantial effect on the New Zealand dollar. Most RBNZ-watchers do not expect a rate hike until at least the latter half of next year, but that might possibly change with new Acting Governor Grant Spencer presiding over this meeting. Most likely, there will be little change from the last meeting in August, but any hawkish leanings due to a higher inflation outlook, higher commodity prices, and/or recent weakness in the New Zealand dollar could give a boost to NZD/USD. In the absence of such hawkishness, the New Zealand dollar is likely to continue falling against the newfound Fed-driven strength of the US dollar.

From a technical perspective, Tuesday’s NZD/USD breakdown was driven mostly by the strong surge in the US dollar. In the process, the currency pair broke down below a rising trend line extending back to the late-August low. This breakdown extends the pair’s fall from the late-July highs above the key 0.7500 psychological resistance level. If the RBNZ fails to add a hawkish tone to Thursday’s statement, as might be expected, the New Zealand dollar should continue to submit to the US dollar rebound and recovery. In this event, any further drop below 0.7200 should target the next major downside objective around the key 0.7050 support level.