NZD slides on Fed taper expectations

The New Zealand dollar has posted sharp losses to start off the trading week. In the North American session, NZD/USD is trading at 0.6755, down 0.63% on the day. The kiwi continues to struggle and is close to a 12-month low.

US inflation remains hot

The US inflation report for November did not hit the 7.0% level as expected, but it was certainly close. Headline CPI came in at 6.8% y/y, the highest reading since 1982. On a month-to-month basis, CPI increased by 0.8%, down from the previous reading of 0.9% but above the forecast of 0.7%. As well, inflation expectations remained unchanged at 4.9%. It has become increasingly clear that inflation is not transitory and the focus now is on the size of the Fed taper and liftoff for a rate hike.

The Fed holds its policy meeting on Wednesday and the markets are expecting the Fed to double the pace of its taper to USD 30 billion/month. The latest inflation report is further proof that the Fed needs to put itself in a position to raise rates. By accelerating the taper, the bond purchase programme will wind up in March and the Fed can then hike rates soon afterwards. The dot plot at the upcoming policy meeting will be closely watched by the markets as investors try to pinpoint when the Fed might raise rates.

This week has a spate of central bank decisions, which should make for a busy week for the currency markets. The New Zealand central bank is not meeting this week, but RBNZ Governor Frank Orr will testify before a parliamentary committee, and this event could be a market-mover for the New Zealand dollar. The bank had planned a series of rate hikes extending into 2022, but the Omicron variant has become a significant wild card which could upend the plans of the RBNZ to raise rates. If Orr hints at a suspension of rate hikes due to Omicron, the New Zealand dollar could lose ground.

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NZD/USD Technical

• There is resistance at 0.6835. Closely above is resistance at 0.6875
• NZD/USD has support at 0.6749. Below, there is support at the round number of 0.6700

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