The New Zealand dollar plunged against the greenback yesterday despite the announcement of a 50-basis point rate hike by the Reserve Bank of New Zealand (RBNZ). Firstly, the market had priced in multiple rate hikes this year. Secondly, the RBNZ statement that accompanied the policy decision indicated that steep rate hikes might not be a regular occurrence. This triggered the Kiwi dollar sell-off. Overall, the NZD/USD pair declined from a high of 0.6905 to a low of 0.6750 in the past 24 hours.
The Reserve Bank of New Zealand surprised the market and economists by announcing a 50-basis points rate hike, the highest since the beginning of the OCR (official cash rate) in 1999. Economists had anticipated only a 25 basis point rate hike, matching the increases in the last three policy meetings. The gutsy move has shifted the benchmark rate to 1.50%, from 1%.
Regarding the larger-than-anticipated rate hike, the policy committee stated that the decision paves the way for additional policy leeway to tackle the highly unpredictable worldwide economic scenario.
The committee also pointed out that the Russia-Ukraine war has considerably increased logistics issues, bolstering the prices of commodities and energy.
The RBNZ Governor, Adrian Orr, believes that inflation must be curbed in immediately since the CPI inflation rate has risen to 5.9% and is expected to rise further.
In the policy statement, Adrian Orr points out that the consumer price inflation remains higher than the targets of several central banks.
Notably, the rate hike was announced on the same day Statistics New Zealand acknowledged the steepest food price increase in the last 10 years. The price of fruit and vegetables has surged 18% on a y-o-y basis. Likewise, the price of cabbage has increased 100% over a year. All other vegetables, including tomatoes, lettuce, and broccoli, are also seeing a surge in prices.
The Reserve Bank of New Zealand targets an inflation rate of between 1% and 3%. The rate hike is also expected to slightly cool the housing market. Since the beginning of the pandemic, house prices have increased by roughly 40%. However, it is expected to decrease by 5% to 10% this year. Economists and also the RBNZ forecasts further rate hikes this year.
In the US, the Bureau of Labor Statistics stated that the country’s producer price index (PPI) increased 1.40% m-o-m in March, following a 0.90% rise in the earlier month and greater than the 1.10% growth anticipated by economists.
The increase was led by a 2.30% rise in final demand for goods. Also, the index for final demand services grew by 0.90%.
On a y-o-y basis, the producer price index surged 11.20% in March 2022. The reported figure reflects the largest increase since the organization started calculating annual data in November 2010.
Excluding foods, energy, and trade services, the core PPI increased 0.90% in March, following a 0.20% rise in the earlier month and greater than the 0.50% growth anticipated by economists. The reported figure reflects the largest increase since January 2021, when the PPI rose by 1%. On a y-o-y basis, core PPI, which excludes foods, energy, and trade services, surged 7%.
For two reasons, the NZD/USD may remain range-bound with a slight bearish bias despite the steep rate hike by the RBNZ. Firstly, the currency market was already having a hawkish view of the Kiwi dollar. Specifically, the NZD/USD pair had been on an uptrend since January 25. Secondly, the highlighted statement made by the RBNZ Governor indicates that steep rate hikes may not continue. This triggered the New Zealand dollar sell-off.
The historical price chart indicates that the NZD/USD pair is declining after facing resistance at 0.6905. The next support is anticipated only near 0.6680. Additionally, the currency pair is trading below its 50-day moving average, while the MACD indicator has a negative reading. Therefore, we are anticipating the currency pair to remain in a downtrend in the short term.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
