The New Zealand Dollar surges higher following the RBNZ policy meeting on Wednesday.
Although the RBNZ left interest rates unchanged, commentary from Governor Orr suggested the possibility of further rate hikes.
NZD/USD pushed to a new peak above 0.6200 following the meeting, extending its short-term uptrend.
The New Zealand Dollar (NZD) rallied on Wednesday against the US Dollar (USD) following the Reserve Bank of New Zealand (RBNZ) meeting in the early hours. However, the NZD/USD pair’s high at 0.6208 during the Asian session has pulled back all the way to 0.6151 at the time of writing during the US session. This still amounts to a 0.25% intraday gain.
Although the RBNZ left the Official Cash Rate unchanged, the Kiwi rose after RBNZ Governor Adrian Orr said he would not rule out further interest rate hikes if inflation remained elevated. The prospect of higher interest rates is bullish for currencies as it attracts higher capital inflows.
Daily digest market movers: New Zealand Dollar surges after RBNZ meeting
The New Zealand Dollar rallies after the RBNZ Governor mentions the possibility interest rates could rise even higher in the future, depending on the outlook for inflation.
The bank left the Official Cash Rate (OCR) at 5.50% at the meeting, however, as markets had expected.
The hawkish tone of press conference after the meeting surprised many investors as New Zealand data – though still elevated – has come out below expectations recently, suggesting, if anything, interest rates are at risk of being cut.
Official data from Statistics New Zealand (Stats NZ) showed that the Consumer Price Index (CPI) in the 12 months to September rose 5.6%, lower than expectations of 5.9% and the prior quarter’s reading of 6.0%. On a quarterly basis, New Zealand’s inflation increased to 1.8% but fell short of expectations of 2.0%.
New Zealand’s Unemployment Rate climbed to 3.9% in the September quarter, compared with 3.6% last quarter.
The new center right-wing coalition government has plans to change the RBNZ’s dual mandate, which combines maintaining price stability with full employment. They want to scrap the employment part and for the RBNZ to focus on price stability.
Preliminary talks between the new government and RBNZ officials were characterized as being “constructive” by Orr, suggesting the bank may be open to changing to a single mandate.
Such a move would enable the RBNZ to be more single-minded about bringing inflation down using higher interest rates and regardless of the impact on the economy and labor market, it thus could be viewed as a hawkish development and bullish for NZD.
New Zealand Dollar technical analysis: NZD/USD peaks above 0.6200
NZD/USD – the number of US Dollars that can be bought with one New Zealand Dollar – peaks above 0.6200 after rallying following the RBNZ policy meeting. Although it has pulled back down since, the pair remains in a short and medium-term bullish trend, which continues to bias longs over shorts.
The MACD momentum indicator is rising in line with price suggesting the short and medium-term uptrend is healthy.
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New Zealand Dollar vs US Dollar: Daily Chart
Last night’s post-RBNZ surge means a possible bullish inverse head and shoulders (H&S) pattern which formed at the autumn lows has almost reached its conservative price target of 0.6215.
The pair may be in the process of forming a bearish shooting star Japanese candlestick pattern on Wednesday. If the candlestick retains its shape at the end of the day and is followed by a strong bearish candle on Thursday, it could signal a short-term bearish correction.
A break above the current 0.6208 highs, however, would add impetus to the short and medium-term uptrend. The next major resistance level is then at 0.6238, where the 100-week Simple Moving Average (SMA) resides followed by 0.6274, the July 27 highs.
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New Zealand Dollar vs US Dollar: 4-hour Chart
A possible bearish ending wedge price pattern, which formed on the 4-hour chart, failed to signal a move lower as price actually broke out to the upside extending the uptrend. Whilst this could mark an exhaustion move more downside would be required to confirm.
A possible tweezer top Japanese candlestick reversal pattern may have formed at the highs (circled). This is a short-term bearish signal. The pair is already finding support from the upper boundary line of the wedge at 0.6140. If it pulls back any lower, it could find support at the lower boundary line, at 0.6080.
The long-term trend is still overall bearish, suggesting a risk of a recapitulation remains.
RBNZ FAQs
The Reserve Bank of New Zealand (RBNZ) is the country’s central bank. Its economic objectives are achieving and maintaining price stability – achieved when inflation, measured by the Consumer Price Index (CPI), falls within the band of between 1% and 3% – and supporting maximum sustainable employment.
The Reserve Bank of New Zealand’s (RBNZ) Monetary Policy Committee (MPC) decides the appropriate level of the Official Cash Rate (OCR) according to its objectives. When inflation is above target, the bank will attempt to tame it by raising its key OCR, making it more expensive for households and businesses to borrow money and thus cooling the economy. Higher interest rates are generally positive for the New Zealand Dollar (NZD) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken NZD.
Employment is important for the Reserve Bank of New Zealand (RBNZ) because a tight labor market can fuel inflation. The RBNZ’s goal of “maximum sustainable employment” is defined as the highest use of labor resources that can be sustained over time without creating an acceleration in inflation. “When employment is at its maximum sustainable level, there will be low and stable inflation. However, if employment is above the maximum sustainable level for too long, it will eventually cause prices to rise more and more quickly, requiring the MPC to raise interest rates to keep inflation under control,” the bank says.
In extreme situations, the Reserve Bank of New Zealand (RBNZ) can enact a monetary policy tool called Quantitative Easing. QE is the process by which the RBNZ prints local currency and uses it to buy assets – usually government or corporate bonds – from banks and other financial institutions with the aim to increase the domestic money supply and spur economic activity. QE usually results in a weaker New Zealand Dollar (NZD). QE is a last resort when simply lowering interest rates is unlikely to achieve the objectives of the central bank. The RBNZ used it during the Covid-19 pandemic.
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