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NZD/USD fails to defend gains despite a hawkish rate hike

It looks like the Kiwi will break below its 200-day average, likely leading to more losses in the short-term perspective.

The New Zealand dollar, also known as the Kiwi, erased its daily gains on Wednesday as the initial post-rate hike spike was sold-off due to the market’s risk-off environment.

RBNZ sees elevated inflation

Earlier today, the RBNZ hiked its cash rate by 50 basis points (0.5%) to 4.75%, as projected, and signaled additional tightening since inflation remains too high.

At the following press conference, the RBNZ Governor Adrian Orr said they are still predicting a recession over a 9-12 month period, while it is too early to determine the impact of Cyclone Gabrielle.

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For the next meeting, he said that all options remain on the table, including 25, 50, and 75 bps hikes. Moreover, there was no evidence that inflation targets should be raised.

The markets are pricing in 35 basis points of rate hikes for the April 5 meeting. A 25-bps hike seems more plausible, but investors can’t rule out a final 50-bps move before second-quarter data deterioration.

“This means that the RBNZ could offer support to NZD into the start of Q2, but we think that a worsening in data and slower inflation should leave further NZD/USD upside heavily dependent on a favorable external environment,” economists at ING reported after the monetary policy meeting.

They maintained their NZD/USD target at 0.67 for the third quarter, an 8% gain from the current levels near 0.62.

Although New Zealand Prime Minister (PM) Chris Hipkins has pledged a NZ$300 million ($187.08 million) hurricane relief package, the recent release of helicopter money can potentially increase inflationary pressures.

FOMC minutes in focus

In other news, the US Federal Reserve will publish the minutes of its first policy meeting of the year during the late American session. In addition, market players will closely monitor statements from central bank officials.

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It will be curious to see if policymakers seriously considered a return to 50 basis point rate rises if the recent dip in inflation proves transitory or if labor market fundamentals indicate the economy can withstand more significant increases. If so, investors may consider the likelihood of a 50 basis point increase at the next meeting.

The CME Group FedWatch Tool indicates that the probability of a 50 basis point rise in March is now 20%, indicating that the USD might see another leg higher if the Fed’s minutes release paves the way for such a move.

Technically speaking, the NZD/USD pair will likely retest the 200-day moving average (the blue line) near 0.6185 and if not held, we might see a decline toward the round 0.60 level.

NZD/USD daily chart

NZD/USD daily chart, source: author´s analysis, tradingview.com

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