NZD flies as risk appetite returns

The New Zealand dollar has accelerated its rally, and is up 0.86% on the day, as NZD/USD trades just shy of the 0.68 level.

Sanctions softer than expected

The US and other western nations have slapped further sanctions on Russia, after Moscow sent troops to two breakaway regions in eastern Ukraine. Still, the financial markets breathed a sigh of relief as the sanctions were less severe than expected. Perhaps the most notable response was from Germany, which has suspended the Nord Stream 2 pipeline, which is intended to deliver Russian natural gas to Europe.

The US has canceled a meeting between the US Secretary of State and the Russian Foreign Minister, and a Biden-Putin summit will not take place, given the volatile situation in Ukraine. Nonetheless, the US response leaves Putin with a possibility of climbing down the tree and risk appetite has improved, at least for now. That has boosted risk-sensitive currencies such as the New Zealand dollar, which has climbed to a 1-month high.

Closer to home, the RBNZ raised rates today as was widely expected. This marks a third straight hike of 0.25%, bringing the cash rate to 1.00%. The central bank is committed to lowering inflation, which has been buoyed by surging energy prices and a red-hot housing market. The rate statement was hawkish, with the RBNZ stating it would start quantitative tightening by reducing its balance sheet. This is another step in the normalization of monetary policy by the RBNZ.

How far will the RBNZ go with its tightening cycle? There is a divergence of opinion from economists as to what will be the peak of the cash rate, with a range of 2.50%-3%. The RBNZ will be the first to admit that inflation and the tightness in the labor market have surprised to the upside. Inflation has hit 5.9%, almost double the upper limit of the bank’s inflation target of 3%. The outlook does not appear favorable for inflation easing anytime soon, with oil poised to break the USD 100 barrier and a weak New Zealand dollar. This means we can expect the central bank to be aggressive in its rate policy this year and in 2023.

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NZD/USD Technical

• NZD/USD is testing resistance at 0.6752 and closing in on resistance at 0.6810. Above, there is resistance at 0.6889
• 0.6615 is providing support, followed by 0.6536
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