NZD/USD Drops after Forceful 0.5% Rate Cut by the RBNZ

NZD/USD Analysis

The Reserve Bank of New Zealand slashed rates by 50 basis points today, accelerating its pace following August's 0.25% pivot. Policymakers did not provide guidance, saying that future changes will depend on its ^[1] "evolving assessment of the economy". Despite the non-committal stance, there is ample room for lower aggressive easing ahead.

Inflation has cooled substantially and officials believe it is already within the 1%-3% target, which creates concern for undershooting the midpoint. Furthermore the economy contracted 0.2% q/q in the second quarter, while unemployment has climbed to the highest levels in more than three years. We also need to remember that RBNZ comes from a very restrictive setting, as it started tightening much earlier than its counterparts in late-2021 and hiked rates by 525 bps, matched only by the Fed.

NZD/USD drops this month as Fed Chair Powell adopted a more reserved rhetoric ^[2] after September's outsized pivot and Friday's strong jobs report reinforced his cautious messaging, with markets now expecting another 50 bps of cuts this year, in line with the central bank's projections. Today's forceful action by the RBNZ extends the pair's losses and exposes it to the 0.6000 handle, although the 2024 lows (0.5848) look distant for now.

On the other hand, the Fed has set a clearer and aggressive easing path, so the policy differential may not dictate much more downside. NZD/USD tries to find some reprieve at the bottom border of the daily Ichimoku Cloud and along with oversold RSI a rebound would not be unreasonable. Strong catalyst would be needed though for a return above the EMA200 (black line) that would pause the bearish bias. The next leg of the move will be determined by Thursday's US CPI inflation update. Further moderation would validate the Fed's easing path, but upside surprise would challenge it and could provide support to the greenback.