The New Zealand dollar experienced a decline subsequent to the Reserve Bank of New Zealand’s (RBNZ) decision to increase its benchmark rate by 25 basis points, which was in accordance with anticipated projections, but also indicated that further tightening may not be necessary.
The anticipated 25 basis point increase to 5.5% in the cash rate by the central bank of New Zealand was a lesser adjustment than the 50 basis points change made in April, which was done in response to persistent inflationary pressures. However, the pace of this monetary tightening has decelerated due to the delayed effects of prior rate hikes on economic activity – evidenced by underwhelming macro data in recent months. Furthermore, consensus forecasts for New Zealand’s economic growth this year have declined significantly since April.
NZD/USD 5-minute Chart
There were individuals within the market who anticipated a peak interest rate of 5.75% during this economic cycle due to the decrease in inflation from a three-decade high of 7.3% to 6.7%. Despite the decline in inflation, it remains significantly above the Reserve Bank of New Zealand’s (RBNZ) target band of 1%-3%. Additionally, the job market, along with wage growth, remains robust. Nonetheless, RBNZ’s recognition that interest rates have reached their apex has had a negative impact on the value of NZD.
The current risk sentiment has been overshadowed by the lack of advancement in Washington towards increasing the US government’s debt ceiling, and the reduced anticipation for a Fed rate cut this year following the hawkish comments made by multiple Fed officials. The money markets predict that the Fed will maintain its current interest rates during its upcoming meeting in June, although they have postponed their projection of the first rate cut from mid-2023 to the end of this year.
NZD/USD Daily Chart
The risk-sensitive NZD/USD has pulled back as a result within its well-established range since March, pushing back bullish prospects highlighted in the previous update. See “Is the New Zealand Dollar Turning Corners? Any break below the crucial support at the March low of 0.6085 would negate the optimistic outlook.
The NZD/USD pair has been experiencing a range-bound movement between 0.6085-0.6385 on technical charts since the beginning of March. The width of this pattern suggests that any breakout from this range could potentially result in a 300-pip move, providing a possible price objective.