RBNZ super-hikes but NZD slides

RBNZ hikes rates by 0.50%

The RBNZ came out swinging on Wednesday, as it hiked the Cash Rate to 1.50%, with an oversized hike of 50-basis points. Ordinarily, a sharp rate hike by a central bank would prop up the local currency, but that was not the case today. The central bank seemed to hit the right buttons to show its hawkish stance, with its largest rate hike since April 2000. However, instead of rising, the New Zealand dollar took a tumble, falling more than 1 percent.

What happened to the New Zealand dollar, which now finds itself at 4-week lows? The RBNZ seemed to hit the right hawkish buttons, which should have boosted the kiwi. The super-size rate hike was not priced in by the markets, which had expected a modest 0.25% increase. In its rate statement, the RBNZ noted that it planned to bring forward monetary normalisation in order to lower inflation. What sent the New Zealand dollar spinning on its backside was the fact that the central bank did not change its terminal policy forecasts for 2022 and 2023. The markets chose to focus on the lack of new forecasts rather than the hike and the rate statement, sending the New Zealand dollar sharply lower.

The RBNZ is hoping that today’s hike will curb not just inflationary pressures but also inflation expectations. Business confidence is in deep-freeze, with spiralling inflation one of the key concerns facing businesses. The RBNZ has no plan to let up on its rate-hike cycle, which raises concerns as to whether the central bank can shepherd the economy to a ‘soft landing’ once inflation is brought down to lower levels. If the RBNZ is over-aggressive in its tightening, that could result in the dampening of economic growth and even a recession.  As for today’s performance from the RBNZ, it’s clear that it will take more than 0.50% rate hikes to boost the New Zealand dollar.

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NZD/USD Technical

• There is resistance at 0.6902, followed by 0.6980
• NZD/USD has support at 0.6769 and 0.6691

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