New Zealand dollar stems the bleeding

The New Zealand dollar is unchanged on Tuesday, but the currency has been under pressure. NZD/USD has managed only one gain in the past two weeks. On Monday, NZD/USD touched a low of 0.6715, its lowest level since February 28^th.

Orr says further tightening on the way

RBNZ Governor Frank Orr has come out swinging like a hawk, but it’s questionable if that will do much for the New Zealand dollar, which hasn’t reacted to his comments. In remarks on Monday at an IMF event, Orr said the RBNZ had provided “strong forward guidance” and that he expected to “be doing more rate rises over coming quarters.” It’s not that investors don’t believe that Orr plans to tighten, but rather that he isn’t saying anything that the markets don’t already know.

It was crystal clear that the RBNZ meant business when they hiked rates by 0.50% last week, its largest rate increase since 2000. That should have given the New Zealand dollar a boost, but instead, NZD/USD fell as much as 1% before recovering about half of those losses. The markets were unhappy that the central bank did not change its policy forecasts for 2022 and 2023, and chose to ignore the oversize rate hike.

With inflation spiralling, the RBNZ has little choice but to aggressively raise rates. Inflation hit 5.9% in Q4 of 2020 and could be headed above 7% in Q1. In his comments, Orr touched on the quandary facing the central bank – acting against the threat of increasing inflation expectations, while avoiding too sharp a slowdown in the economy. Orr will have to show a gentle hand in the pace and extent of rate increases in order to achieve a delicate balance that will curb inflation while enabling the economy to make a soft landing.

On the economic front, there was positive news as the services sector expanded for the first time in eight months. The BusinessNZ Services Index rose to 51.6 in March, up from 48.6 prior (a reading over 50.0 indicates expansion). The strong release points to an improvement in services and supports the idea that GDP will rebound in Q1 after a weak fourth quarter in 2021.

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NZD/USD Technical

• There is resistance at 0.6856 and 0.6953
• NZD/USD has support at 0.6806 and 0.6709

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