NZD/USD drops to 2-year lows at around 0.6202 ahead of the FOMC’s decision

Dismal market mood spurred by fears that the US Federal Reserve might raise rates by 75 bps, but it would trigger the US into a recession, has risk-sensitive currencies like the New Zealand dollar on the defensive. At the time of writing, the NZD/USD is down 0.69% daily, trading at 0.6211, at new 2-year lows.

Sentiment and safe-haven flows, a headwind for the NZD

Global equities are tumbling for the second consecutive day. In the meantime, the appetite for safe-haven peers has grown, as the US Dollar Index, a gauge of the greenback’s value vs. six currencies, advances 0.42%, currently at 105.636, at 20-year highs, a headwind for the NZD/USD.

Last Friday’s high US inflation report, topping at around 8.6% YoY, caused a reaction on Monday. Since the opening of the Asian session, the market mood shifted to risk-off, with US Treasury yields skyrocketing above the 3% threshold, and during the day, the 2s-10s yield curve inverted, a signal of a US recession. Also, the re-emergence of China’s Covid-19 outbreak added another piece to the already battered sentiment.

In the meantime, reports surfaced that the Fed might accelerate the pace of tightening and lift rates by 75 bps, loom. Most Wall Street analysts updated their calls for the Federal Funds Rate (FFR) to finish June at 1.75%, contrary to the 1.50% estimated on Monday.

That said, the NZD/USD extended its losses. So far is down 2.25% in the week, with just two trading days, almost matching last week’s losses.

Data-wise, the US economic docket featured prices paid by producers, which heightened at around 10.8% YoY, though they were ignored by traders, with their focus on the Fed. The CME FedWatch Tool reports that investors have priced in a 93.2% chance of a US Federal Reserve 0.75% rate hike in the June meeting.

In the week ahead, the New Zealand economic docket will reveal the Current Account for Q1, estimated at NZ$-5.5 billion. The US calendar will feature May’s Retail Sales, estimated to grow by 0.2% MoM, alongside the highlight of the week, the US Federal Reserve Open Market Committee (FOMC) interest rates decision.

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