New Zealand dollar spikes after RBNZ decision

• RBNZ holds rates but sends a hawkish message
• NZD/USD spikes 1% higher but pares gains

The New Zealand dollar surged 1% on Wednesday but has surrendered most of the gains. In the European session, NZD/USD is trading at 0.6149, up 0.20%.

RBNZ delivers a hawkish hold

The Reserve Bank of New Zealand maintained the cash rate at 5.5% for a fourth straight time, as expected. The RBNZ reiterated its message of 'higher for longer' and also warned that rates could move higher, in what was a surprisingly hawkish message to the markets. The New Zealand dollar rose as much as 1% in the aftermath of the meeting but has pared most of these gains.

The RBNZ hawkish hold was a push-back against rising market speculation of a rate cut in mid-2024. Inflation has been falling and the labour market has been cooling down, fuelling market expectations that these conditions will result in a rate cut next year. However, with inflation running at a 5.6% clip, well above the 1%-3% target range, inflation has not been beaten and the central bank wants the flexibility of being able to raise rates without triggering market turmoil. This made it necessary for Governor Orr to send a strong message to the markets that rate cuts are not around the corner.

The rate statement reiterated that inflation remains too high and rates would need to remain restrictive for a prolonged period. Orr echoed this stance in his post-meeting press conference, saying that the risk to inflation was skewed to the upside and expressed concern about inflation remaining above the target range.

Another significant point was the projection of the cash peak rate, which was revised upwards from 5.57% to 5.69%. This signals that the RBNZ may not be done with its tightening cycle and could raise rates early next year.

FedSpeak was a mixed bag on Tuesday. Fed Governor Christopher Waller said that he was "increasingly confident" that rates had peaked and that the Fed could trim rates in the coming months if inflation continued on its downswing. This was in contrast to Fed Governor Michelle Bowman, who said further hikes will likely be needed in order to bring inflation back down to the 2% target.

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NZD/USD Technical

• NZD/USD tested resistance at 0.6159 earlier. Above, there is resistance at 0.6227
• There is support at 0.6121 and 0.6053