NZD collapses as RBNZ hints at ending its tightening cycle
Thursday 25 May, 2023
Daily Currency UpdateThe New Zealand dollar was the worst-performing major through trade on Wednesday, pummeled by investors following a dovish RBNZ policy update and a definitive risk-off move. As anticipated the RBNZ lifted rates by 25 basis points bringing the OCR to 5.5%, yet surprised markets by hinting that this was the last rate adjustment within this cycle and a peak had been reached, The Monetary Policy Committee note it is “now confident that monetary policy is restrictive enough to meet inflation objectives”. With the NZD strengthening against key crosses over the last fortnight on expectations the cash rate would peak at 5.9% markets rushed to correct positions. The NZD tumbled against all crosses but most notably is down 2.3% against the USD, sliding off highs above US$0.6250 to mark fresh 2-month lows at US$0.6095 while slumping 1.3% lower against the AUD, giving up 0.94 to trade below 0.9350. With retail sales plunging earlier in the day and consumer confidence falling toward GFC levels there are clear signs to suggest the domestic economy has now entered recession. While not confirmed in GDP data other macro metrics suggest lagging data will show the economy entered recession in Q4. With the RBNZ raising rates by 200 points since then, there is little scope for positivity leading into the second half of the year.
With little of note on today’s macro ticket, our attentions remain on broader risk drivers. A rebound in appetite should see the NZD climb back to US$0.6150 while an extension in this risk-off push could see the NZD test the March low of US$0.6085.
Key MoversThe USD is broadly stronger today, buoyed by the risk-off mood that has enveloped markets this week. Elevated uncertainty surrounding US debt ceiling negotiations, China growth headwinds and persistent UK inflation pressures forced investors to move risk assets, driving equity indices lower and the USD higher. The DXY index jumped 0.3% on the day while the euro managed to stave off wholesale losses and the GBP slipped below 1.24. Having jumped upward in the moments following the upward surprise in CPI data the GBP drifted lower as markets took stock and absorbed the implication of this latest inflation shock. Headline inflation only fell to 8.7% while core inflation jumped to 6.8% n a month where wholesale downward corrections were expected. Inflation remains much stickier than anticipated and it is likely the Bank of England will be forced to continue raising rates. With domestic economic growth already waning tighter monetary policy can only be bad for the future macroeconomic outlook.
With only second-tier data on hand today our focus will remain squarely affixed to US debt ceiling negotiations. The political impasse will likely continue through the rest of the week as both sides remain divided. While the market remains optimistic a deal will be struck it is more likely a last-minute extension will be agreed, kicking the can down the road a few months.
- NZD/USD: 0.6080 - 0.6150 ▼
- NZD/EUR: 0.5650 - 0.5820 ▼
- GBP/NZD: 1.9850 - 2.0450 ▲
- NZD/AUD: 0.9280 - 0.9380 ▼
- NZD/CAD: 0.8250 - 0.8450 ▼