The Kiwi failed to hold today’s gains and traded neutral ahead of the US session, last seen at around 0.6470 as traders sold the post-RBNZ initial rally.
RBNZ hawkish surprise
The Reserve Bank of New Zealand (RBNZ) raised rates by 50 basis points to 2.0 % today, but its revised rate predictions were a significant hawkish surprise.
“The Bank now forecasts the policy rate at 3.25-3.50% by year-end and around 200bp of total tightening by the end of 2023 – therefore signaling a terminal rate around 4.0%. We suspect the rate projections may be too hawkish, but this is a story for the long run: for now, 50bp hikes should keep the NZD on track for a return to 0.70 by year-end.” economists at ING said following the decision.
Reserve Bank of New Zealand (RBNZ) Governor Adrian Orr spoke at the press conference, saying the central bank needs to anchor inflation expectations. Furthermore, he is confident that households can withstand higher rates.
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Additionally, the range of estimates for a neutral rate is around 2% to 3%, need rates above 3%, while a recession is not in their central forecasts, but is possible.
The NZD/USD pair rose circa 60 pips, or nearly 1% in the initial reaction, jumping above the 0.65 level for the first time since early May. However, most gains were gone during the EU session as the mood in the markets remained downbeat.
US data in focus
On Tuesday, new home sales in the United States hit a nine-year low. As building prices and borrowing rates rise, affordability is being strained. That trend will likely continue in the following months.
The US durable goods orders for April will be released today on the economic calendar. Market participants anticipate a drop from March’s levels. The data, on the other hand, are expected to remain positive, perhaps supporting the USD in the short term.
The FOMC minutes from the most recent Fed meeting will be released later. Two more 50 basis point Fed rate hikes have already been built into the markets. Investors will also be watching the Federal Reserve’s balance sheet reduction approach attentively.
The inability to stay above 0.65 could be bearish, also the fact that the currency has failed to capitalize on a 50 bps rate hike + hawkish outlook. Thus, we might see a further downside to 0.641, or toward the short-term uptrend line near 0.6375.