NZD/USD set to refresh three-month high above 0.6250 as RBNZ-Fed policy divergence widens

The NZD/USD pair is on the edge of refreshing its three-month high above 0.6250 ahead. The presence of multiple tailwinds such as risk-on profile, widened Reserve Bank of New Zealand (RBNZ)-Federal Reserve (Fed) policy divergence, and weak US Dollar Index (DXY) have strengthened the Kiwi Dollar against the Greenback.

The risk profile is extremely upbeat as plenty of Fed policymakers are expecting a slowdown in the rate hike pace ahead. Positive market sentiment empowered the S&P500 to carry forward its upside momentum on Wednesday. Meanwhile, the US dollar index (DXY) slipped firmly to near 106.10 despite a robust increase in demand for Durable Goods.

The US Durable Goods Orders data landed at 1%, significantly higher than the estimates and the prior release of 0.4%. This has indicated that consumer demand is still solid despite accelerating interest rates and higher inflation rates.

The returns on US Treasury bonds have dropped further as the minutes of the Federal Open Market Committee (FOMC) dictated that a slowdown in the rate hike pace would allow Fed chair Jerome Powell to judge progress on their goals. The 10-year US Treasury yields have dropped below 3.70%.

On the New Zealand front, investors are still in a hangover of 75 basis points (bps) rate hike and consideration of the full percent rate in its monetary policy meeting on Wednesday. It seems that the battle against a historic surge in inflation is demanding more blood and sweat from RBNZ Governor Adrian Orr. The RBNZ has pushed its Official Cash Rate (OCR) to 4.25%, which has widened the RBNZ-Fed policy divergence.