NZ dollar falls as FOMC talks tough

The New Zealand dollar has extended its losses on Thursday and dropped below the 69 line. In the North American session, NZD/USD is trading at 0.6887, down 0.42% on the day.

Fed puts 0.50% hikes on the table

The hawkishness of the FOMC minutes was not a surprise, given that the markets had heard this from Fed members George and Brainard a day earlier. Still, a hawkish Fed that is accelerating its tightening is good news for the US dollar. The minutes signalled that the Fed plans to scale back the balance sheet (quantitative tightening) at a faster pace than previously expected, cutting up to USD 95 billion/month starting in September.

The minutes hinted that the Fed could implement super-size 1/2 point hikes in the coming months, in order to curb red-hot inflation. Brainard said the same thing on Tuesday, but this was noteworthy because she has been of the most dovish members of the FOMC. Clearly, the Fed is concerned that the traditional 0.25% rate moves may not suffice to wrestle down high inflation. The Fed has been behind the ball in tackling inflation, and firing 0.50% salvos is one way to demonstrate to critics that it is taking strong action. The Fed has been telegraphing the markets that 1/2 point increases are on the table, in order to minimize market volatility. Still, the sheer size of such hikes would likely provide a boost to the US dollar, even if they have been priced in.

The RBNZ is well into its rate-hike cycle and has raised the cash rate from a record-low 0.25% to 1.00%. The central bank holds a policy meeting next week and there is a strong likelihood of a rate increase. RBNZ forecasts show rates rising to 2.5% over the next 12 months and peaking at about 3.25% at the end of 2023.

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NZD/USD Technical

• 0.6986 is the first line of resistance, followed by 0.7054
• There is support at 0.6863 and 0.6808

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