Reserve Bank of New Zealand Preview: A rate hike fully priced in, lose-lose for the Kiwi?

NZD/USD is languishing at multi-week lows, threatening the 0.6900 level ahead of the Reserve Bank of New Zealand (RBNZ) showdown on Wednesday. The South Pacific Island nation is set for its second consecutive interest rate hike to combat rising inflationary pressures, as the economy gradually emerges from Delta covid variant outbreak-led lockdown measures.

OCR hike: How much is too much?

The RBNZ is eagerly anticipated to hike the Official Cash Rate (OCR) by 25 basis points (bps) from 0.50% to 0.75% on November 24. The central bank will steer the rate for the second time in a row after October’s first-rate lift-off in seven years.

The rate decision will be announced on Wednesday at 0100 GMT. Governor Adrian Orr will hold a press conference following the policy review at 0200 GMT, with fresh economic projections likely to hog the limelight amid a fully priced-in rate hike.

Refinitiv's RBNZWATCH shows a hike is fully priced in - with around a 33% chance the OCR will be raised to 1.00% from the current 0.50%.

About 90% of the economists polled by Reuters predicted the Kiwi central bank to raise the benchmark interest rate by 25 basis points to 0.75% this month.

Therefore, a 25bps rate hike by the RBNZ is almost a done deal, as the economy is in much better shape than the central bank’s previous estimates.

New Zealand's inflation rose to 4.9% YoY in the third quarter, the quickest rise in over a decade, driven by housing-related costs and other supply constraints while well beyond the central bank’s 1-3% target range. Meanwhile, the country’s unemployment rate fell to a record low of 3.4% in Q3.

The RBNZ rate hike will be justified, given that the labor market is the tightest ever and inflation concerns intensify. However, markets contemplate a 25bps or 50bps move by the central bank.

A 50bps rate increase appears excessive, as the country continues to battle community virus spread, with the largest city of Auckland still expected to be under the red zone.

New Zealand Prime Minister Jacinda Ardern announced on Monday that the nation will slowly shift away from the use of lockdowns and will allow all businesses to operate, beginning from December 3.

“Auckland will enter at red, and no region will start at the green,” she added.

Further, rising energy costs, economic uncertainties overseas and Chinese indebted property sector concerns could likely keep the RBNZ from announcing aggressive rate hikes.

NZD/USD technical outlook

NZD/USD is closing in on a critical daily support line at 0.6911, below which a fresh downswing towards the next relevant support around 0.6875 cannot be ruled out, especially on less hawkish forward guidance. On the RBNZ decision, the US dollar’s strength, amid hastening Fed taper expectations, could also offer another blow to kiwi bulls. The 14-day Relative Strength Index (RSI) looks north, well below the central line, suggesting that there is more room for downside. The last line of defense for kiwi buyers is seen at 0.6858.

On the other hand, a 50bps rate hike or any hints on aggressive rate increases going forward could trigger a sharp rebound in NZD/USD back towards the 0.7000 threshold. Further up, the horizontal 100-Daily Moving Average (DMA) at 0.7025 will come into play.

All in all, the path of least resistance appears to the downside, with the 21 and 200-DMA bearish crossover playing out on the daily time frame.

More: Chart of the Day: NZD/USD