RBNZ Raised Rates Again

The Reserve Bank of New Zealand (RBNZ) increased rates by 50 basis points today ^[1], which is was more than baseline expectations and constituted the largest hike since May 2000. This was the fourth straight upward adjustment, with the official cash rate (OCR) now standing at 1.5%.

The Monetary Policy Committee pointed to more rate increases, as it judged "appropriate to continue to tighten monetary conditions" in order to achieve price stability and maximum employment. Furthermore, the minutes showed the officials' belief that increasing rates more now, rather than later, is the "path of least regret".

Back in February, the central bank had upgraded its projections for the official cash rate (OCR) to 2.2% by year-end and 3.3% in December 2023 ^[2]. Today it commented that it remains "comfortable" with this outlook.

RBNZ moved aggressively on interest rates today in order to have more "flexibility" given the uncertain economic environment and to reduce risk of "rising inflation expectations". The last inflation data showed that the Consumer Price Index (CPI) had risen 5.9% year-over-year in Q4 2022, with the Q1 2022 figures expected next week.

Based on the February projections, the central bank saw CPI peaking at 6.6% in the first quarter of the year, but today minutes revealed that officials now expect a peak at 7% during the first half of the year.

US Inflation & the Fed

High inflation is a global problem in the post-pandemic world, exacerbated by the war in Ukraine and Western sanction against Russia. On Tuesday, Headline Consumer Price Index climbed 8.5% year-over-year in March in the United States, marking the highest level since December 1981.

The US Federal Reserve has made bringing inflation down its first priority, having concluded its asset purchases program in March and has also hinted to a reduction of its nearly $9 trillion balance sheet, as early as May.

Furthermore, last month it delivered its first rate hike since 2018 - with a 25 basis points lift-off - and has hinted at more aggressive action if warranted. At the time of writing, CME's FedWatch Tool projected a 50 basis points adjustment in the next meeting in May, with 85.4% probability. ^[3]

NZD/USD Analysis

The pair spiked right after the RBNZ's hawkish action, but quickly dropped as markets assessed the policy differential and tightening prospects between the central banks of New Zealand and the Unites States.

The RBNZ is far ahead than ist major counterparts, but that means that it probably has less room ahead for more adjustments, while the Fed only made its first rate increase last month and yesterday's CPI print supports more aggressive tightening.

NZD/USD rejected 0.6900 and the 200Days EMA after its initial reaction higher and trades firmly in negative territory. This makes it vulnerable to the daily Ichimkou Cloud (0.6760-30), but a move below it, which will bring 0.6627-1 in the spotlight, may not be that easy yet.

The aforementioned cloud area has the ability to support it and the Kiwi tries to stay above the ascending trendline from this year's lows. As such, it has the ability to push again for a move past the 200Days EMA (0.6880) that would put immediate bias on the upside, but it does not inspire much confidence at this stage for sustained strength beyond mid-0.6900s.