NZD/USD: Hiking amid global uncertainties to dampen the kiwi – MUFG

The Reserve Bank of New Zealand (RBNZ) raised its key policy rate by 25bps as expected and importantly there was nothing in the communication to alter the expectations in the market of future rate moves. But the decline in NZD/USD in response to the decision is an indication of the high level of rate hike expectations already priced into the market, economists at MUFG Bank inform.

Market already positioned for RBNZ rate hikes 

“We would argue that for central banks more generally, hiking into current global economic conditions is not as currency supportive as hiking when conditions are more favourable. Rate hikes when growth could deteriorate are never greeted with the same enthusiasm.”

“Some recent evidence of a pick-up in COVID-19 infections in New Zealand; the increased downside risks to growth in China; the fuel and power crunch in Europe; and the continued climb in US yields have all played a role in diminishing a positive FX response to today’s RBNZ rate hike.”

“If global uncertainties rise further, G10 currencies like NZD where high levels of rate hikes are priced for 2022 are more likely to underperform as investors question further the extent of hikes priced.”