NZ dollar sliding, RBNZ expected to pause

• New Zealand dollar slides for a second successive day

The New Zealand dollar is sharply lower for a second straight day. In the North American session, NZD/USD is trading at 0.5904, down 0.71%.

It has been an awful week so far for the New Zealand dollar, which is down 1.55%. NZD/USD tends to have a positive correlation with AUD/USD, which fell sharply today after the Reserve Bank of Australia held rates for a fourth straight time. That move was widely expected, but the Australian dollar is also getting squeezed by a strong US dollar and higher US Treasury yields and the pause hasn’t made the Aussie any more attractive to investors.

RBNZ expected to pause rates

The Reserve Bank of New Zealand follows with its rate decision on Wednesday and is expected to maintain the cash rate at 5.5%. If the RBNZ does pause, it would be for the third straight time and that could weigh on the New Zealand dollar, as was the case with the Australian currency which has fallen sharply today.

I don’t foresee RBNZ policy makers acknowledging that rates have peaked, but that will likely be the market’s take if the RBNZ does opts for a pause on Wednesday. With interest rates extremely high, households are groaning and the central bank would certainly want to provide a bit of relief by not tightening any further.

The primary problem for the RBNZ is of course inflation. The New Zealand economy is getting squeezed by weak domestic consumption and reduced global demand for exports. The central bank has projected a recession, and an end to tightening would be appropriate if it weren’t for inflation running at a 6% clip in the second quarter, double the upper band of the 1-3% target range. Inflation could decline more quickly as the economy cools, but the key question is how long the central bank is willing to wait for inflation to fall before hiking again.

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NZD/USD Technical

• NZD/USD is testing support at 0.5916. The next support line is 0.5833
• There is resistance at 0.5982 and 0.6065

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