New Zealand dollar slides after RBNZ hike

RBNZ delivers another 0.50% hike

The New Zealand dollar has taken a tumble today. In the European session, NZD/USD has declined by 0.88% and is trading at 0.6289. We continue to see plenty of volatility from the New Zealand dollar. Last week, the currency rose 3.33%, but has pared those gains this week and is down 2.47%.

The RBNZ dutifully raised interest rates by 0.50%, for a fourth straight time. This brings the cash rate to an even 3.00%. However, the New Zealand dollar has responded with sharp losses, as the central bank’s inflation and unemployment forecasts have been revised upwards. In its monetary statement, the RBNZ said it expected inflation to start to drop from the current level of 7.3%, but said that inflation will not fall below 3% until June 2024. As well, unemployment is expected to rise to 5% in 2025. In May, the central bank projected inflation would drop under 3% in September 2023 and inflation would rise to 4.7% in 2025.

The central bank holds its next meeting in October. Governor Orr flatly ruled out any predetermination as to what the RBNZ would do. Still, short of a spectacular turnaround in inflation, odds are that the Bank will deliver another 0.50% hike, as its primary focus is to ensure that inflation does not become entrenched. There is the danger that the sharp rate tightening could cause a recession, but that is a price the RBNZ is willing to pay.

The Federal Reserve is doing its best to convey the message that inflation is far from beaten and additional rate hikes are coming. Since the surprising inflation report which showed a decline in CPI, the markets have been holding onto the idea that the Fed will reverse directions next year, which has sent the US dollar sharply lower. The Fed minutes will be released later today, and I expect the Fed to continue to drum out its hawkish stance. Will investors finally buy into the Fed’s hawkish message or ignore what they don’t want to hear? Stay tuned – the dollar could show some volatility after the release of the minutes.

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NZD/USD Technical

• NZD/USD is testing support at 0.6300. Below, there is support at 0.6227
• There is resistance at 0.6385 and 0.6495

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