NZD/USD traders get set for the RBNZ

NZD/USD has traded on the offer on Tuesday, falling from a high of 1.0698 to a low of 1.0637 so far. The US Dollar bulls stepped in to clean up some of the stale orders that were in the market contrary to the economic data of late that has flipped the script on the narrative surrounding the Federal Reserve. 

DXY, an index that measures the greenback vs. a basket of currencies, rallied into last Friday's shorts and moved back into the 104.20s as investors swallowed yet another hard pill in inflationary pointing to US economic data on Tuesday. US Treasury yields hit new highs after both the services and manufacturing sectors in February with S&P Global PMIs beating their prior outcomes and estimates.

Traders are setting up for a longer-than-anticipated stiff monetary policy stance by the Federal Reserve following a slew of strong economic data. ''This process still has a ways to go, in our view,'' analysts at Brown Brothers Harriman explained. The analysts noted that the WIRP suggests 25 bp hikes in March, May, and June that takes Fed Funds to 5.25-5.50%. 

''Given how strong the data have been recently, we see growing risks of a fourth 25 bp hike that takes us up to 5.50-5.75%, though that is not being priced in yet.  This should eventually change,'' the analysts said. ''Strangely enough, an easing cycle is still expected to begin in Q4 but at much lower odds. Eventually, it should be totally priced out into 2024 in the next stage of Fed repricing.''

RBNZ eyed

The next major catalyst for the US Dollar will be the Federal Reserve's release of the minutes of its last meeting on Wednesday. However, in the meanwhile, the focus will be on the Reserve Bank of New Zealand. 

''Today is all about the RBNZ,'' analysts at ANZ Bank said. ''We expect a 50bp hike, and given the inflation risks posed by Gabrielle, it’d be a surprise to see their OCR projections fall,'' they added.

''Greater uncertainty and a sense of resilience to higher rates locally and globally also potentially poses upside risks to the terminal OCR. We think that’ll ultimately be NZD-positive, as will the rebuilding better vibe, which all lies ahead. Bring on 2pm, let’s get this decision behind us!''