The New Zealand dollar is almost unchanged on Wednesday. NZD/USD posted strong gains in the Asian session but has surrendered most of those gains.
RBNZ shows hawkish teeth
The Reserve Bank of New Zealand delivered on expectations, with a 0.50% rate hike which brings the cash rate to 2.0%, its highest level since 2016. The New Zealand dollar dipped ahead of the decision but rallied by over one percent after the rate increase. However, the upswing proved to be brief, as NZD/USD has given up most of those gains.
The rate hike of 0.50% was widely expected, but the markets weren’t sure what to expect from the rate statement. In the end, the statement was quite hawkish, with the RBNZ forecasting that the cash rate will have to increase to 3.4% by the end of 2022 and peak at 3.9% in mid-2023. Prior to today’s statement, the RBNZ had projected that the cash rate would remain below 3% until mid-2023 and peak at 3.4% in 2024. In the revised forecast, the RBNZ is giving notice that the cash rate peak will be higher than expected and the pace of tightening will also be faster than previously anticipated.
In follow-up remarks, Governor Orr acknowledged the possibility of a recession but said that the Bank had to curb the growth in demand in order to rein in inflation and keep inflation expectations in check. The RBNZ has forecast that inflation will peak at 7% in Q2, after a gain of 6.9% in the first quarter. Orr has come out swinging, but it will be a tricky task to aggressively raise rates and slow growth without causing the economy to stall.
- NZD/USD is testing resistance at 0.6475. Above, there is resistance at 0.6540
- There is support at 0.6352 and 0.6287
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