New Zealand Dollar Spiked After the RBNZ Left its Cash Rate Alone at 5.50%. Higher NZD/USD?

New Zealand Dollar, NZD/USD, RBNZ, Fed, China, NZX50 Index – Talking Points

• The New Zealand Dollar reversed losses seen in early trade on the RBNZ pause
• The Kiwi Dollar had sunk on gathering economic clouds gathering in China
• The inflation appears to be centre stage for the RBNZ. If they hike again, will NZD/USD rally?

The New Zealand Dollar sunk to 10-month low prior to the Reserve Bank of New Zealand (RBNZ) meeting then bounced after the bank left rates unchanged at 5.50% at its monetary policy meeting (MPC) today.

US Dollar strength going into the meeting appears to have caught Kiwi bears off guard with the monetary policy statement (MPS) seen by the market as more hawkish than expected.

The official cash rate (OCR) remains at 525 basis points (bp) above the pandemic low and the overnight index swap (OIS) market is now pricing a 50/50 chance of a 25 bp hike in early 2024.

Before today’s gathering, they had not been pricing in any more hikes in this cycle. This tilt in the interest rate market may have underpinned the currency.

The RBNZ were widely anticipated to keep rates hold today. Prior to the pause in July, the bank had previously raised the overnight cash rate (OCR) 12 times since the first lift in October 2021.

New Zealand’s S&P/NZX 50 equity index made a 7-week low before today’s decision and has struggled to make headway in the aftermath.

Sentiment toward risk and growth-orientated assets had been already soured going into today’s APAC session following on from the North American session. Wall Street tumble over 1% on all the major indices.

The negative perspective emanated from strong US retail sales leading to fears of a more hawkish Fed than previously thought.

These notions were re-enforced by comments from Minneapolis Federal Reserve President Neel Kashkari. He questioned the prospect of whether or not the Fed had done enough to get inflation down to the target of 2%.

Concerns around China’s economic recovery have been swirling for some time. Recent data suggests that there could be further policy adjustments from the Peoples Bank of China after they cut its 1-year medium-term lending facility rate yesterday.

Looking ahead, RBNZ Governor Adrian Orr will be hosting a press conference at 0300 GMT today and this article will be further update after the event.

Governor Orr will also appear in front of the Parliament Select Committee on Friday in regard to the monetary policy statement (MPS). They like their acronyms in NZ.

Market expectations are that he is unlikely to deviate from the script that he will deliver later today.

The next RBNZ meeting will be held in early October ahead of a national election on October 14th. The full MPS can be read here.

NZD/USD REACTION TO RBNZ RATE PAUSE

Chart created in TradingView

— Written by Daniel McCarthy, Strategist for DailyFX.com

Please contact Daniel via @DanMcCathyFX on Twitter