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RBNZ Lifts Rates, Sends Kiwi Flying

The kiwi shot higher as the central bank seems ready to bring rates further higher soon.

On Wednesday, the New Zealand dollar was the best performing currency among the majors, jumping more than 1% against the US dollar and flying to one-month highs amid a surprisingly hawkish RBNZ decision.

Central bank ready to fight inflation

Earlier today, the Reserve Bank of New Zealand (RBNZ) met market expectations and hiked the Official Cash Rate (OCR) by 25bps. Furthermore, the central bank also agreed to gradually reduce the reserve bank’s bond holdings under the large-scale asset purchase, LSAP, program.

In fact, the central bank stated that headline Consumer Price Inflation is well above the target range but will return towards the 2 percent midpoint over coming years.

Following the monetary policy decision, Reserve Bank of New Zealand Governor Adrian Orr spoke at a press conference, saying that they cannot rule out 50 bps hikes in the future; rates do need to rise significantly. Additionally, he said that amount of tightening through bond sales is minimal; it’s all about the OCR.

Several large investment banks adjusted their outlook after the hawkish RBNZ decision.

Goldman Sachs said that “In light of today’s hawkish RBNZ guidance and OCR track, we now expect the RBNZ to tighten by +25bp at every meeting in 2022, taking the OCR to 2.5% by year-end (previous peak at 2.0% in August).”

On the other hand, ING seems a bit more negative on the NZD/USD pair, saying, β€œRBNZ is set to remain the most hawkish central bank in the G10 space, a factor that will offer NZD some good support in the medium-term. However, in the short-run, external factors (geopolitics, unstable risk sentiment in the run-in to Fed tightening) continue to pose downside risks to NZD and may soon offset the modestly positive post-RBNZ reaction in the currency.

Daily outlook appears bullish

On its way higher, the NZD/USD pair broke above the long-term bearish trend line, which looks like a solid bullish impetus. Therefore, the significant support is now at the broken trend line, near 0.6720. As long as the Kiwi trades above it, the medium-term outlook appears bullish.

The next target will likely be at 0.6850, where previous highs and lows are converged, followed by the 200-day moving average near 0.6950 (the green line).

NZD/USD daily chart, Source: AuthorΒ΄s analysis, tradingview.com

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