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NZD emboldened as investors question US rate hike expectations

Friday 18 February, 2022

Daily Currency Update

Despite escalating fears Russia and the Ukraine will soon be thrust into war, the NZD rallied through trade on Thursday, moving against the broader risk-off trend on the heels of a weaker USD. Reports Ukrainian government force fired on Russian Separatists in Eastern Ukraine forced the NZD toward an intraday low at 0.6660. Fears a Russian invasion is imminent were stoked by US president Biden after he said he believed there was a very high probability of a Russian incursion, accusing Putin of creating a false justification and pretext for war. While a risk-off mood engulfed financial markets overnight, traditional risk correlated currencies appeared immune as the NZD recovered the early downward shock, climbing steadily overnight to touch highs above 0.67 at 0.6715. While safe haven currencies did outperform, the USD came under pressure as rising tensions and a softer than expected tone from the Fed prompted investors to downgrade expectations for a 50-basis point rate hike next month. With little of note on the domestic ticket, our attentions remain with geo-political developments and key commentary from a number of FOMC policy makers. With market estimates for Fed policy finally poised, we are keenly attuned to any signal the Fed may provide.

Key Movers

Safe haven currencies outperformed through trade on Thursday, with the JPY and CHF outpacing the majority of major counterparts amid fears Russia and the Ukraine will shortly be thrust into war. The USD however was unable to maximise the risk off shift, edging lower on the day as investors absorbed softer than anticipated FOMC policy meeting minutes and looked to adjust monetary policy expectations. While the Fed minutes hinted policy makers were prepared to raise rates at an aggressive clip, in a bid to control excessive inflationary pressure, plans to normalise the balance sheet fell short of market estimates. The softer tone coupled with fears escalating geo-political tensions forced investors to consider the Fed may adopt a more cautious approach next month, with estimates for a 50-basis point hike pared back. With the USD now seemingly divorced from the broader risk narrative any moderation in market estimates for fed policy could prompt a broader US downturn, as we look toward the next FOMC policy meeting in March.

Expected Ranges

  • NZD/USD: 0.6620 - 0.6750 ▲
  • NZD/EUR: 0.5850 - 0.5920 ▲
  • GBP/NZD: 2.0250 - 2.0450 ▲
  • NZD/AUD: 0.9280 - 0.9350 ▲
  • NZD/CAD: 0.8450 - 0.8550 ▲