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NZD steady in face of risk off move

Wednesday 25 May, 2022

Daily Currency Update

The New Zealand dollar tracked lower through trade on Tuesday as the week's early risk on-move gave way to a reversal in risk sentiment. Fears surrounding the global growth outlook overwhelmed investors prompting a 2.5% decline across key equity indices and a depreciation in global rates. Currency markets mirrored the risk-off move and the NZD slipped toward intraday lows at US$0.6425 before a slew of softer than anticipated US macro data sets help lift the currency into the daily close. US services PMI fell while US new home sales plunged 16.6%. The sharp decline in mortgage applications and housing starts has elevated concerns surrounding the US growth outlook. While a series of 50-basis point Fed rate hikes in June and July are already priced in, expectations moving through the second half of the year are no longer as clear cut. Rising uncertainty surrounding the path of US rate hikes and growth has helped add support to the NZD above US$0.64. Having tested a break above US$0.6470 overnight the NZD opens this morning buying US$0.6457. Our attentions turn now to the RBNZ policy update and rate statement. We anticipate policymakers will lift the cash rate by 50 basis points to 2%, the lower bound of the RBNZ neutral estimate. While the terminal rate remains higher at 3.5% the arrival at a neutral policy setting will likely mean future rate hikes are more data-dependent. With expectations for a dovish hike priced in we expect little impact on the currency. Domestic monetary policy continues to take a back seat in shaping NZD direction and come Thursday our attentions shift back to global growth concerns.

Key Movers

Price action across major currencies was mixed through trade on Tuesday as a risk-off shift coupled with declines across key major data sets drove direction. The euro surged toward intraday highs just shy of US$1.0750 following commentary from key ECB policymakers. Just 24 hours after ECB president Lagarde hinted at two 25 basis point hikes through the second half of the year, Austrian Governor Holzmann and Governor Kazaks hinted the bank would not rule out 50 basis point hikes. The shift in tone from the ECB when paired with uncertainty surrounding the path of Fed rate hikes beyond July has tipped the hawkish bias in favour of the euro. Having looked like it might test parity a fortnight ago the euro has enjoyed a remarkable reversal in fortunes and with the market now focusing on the ECB’s hawkish shift there is scope for further upside through the near term. The British pound tumbled, falling below US$1.25 after a shocking PMI print. Services fell 7 points and highlights just how close the UK economy is to tipping into recession. Having touched intraday lows at US$1.2472 the GBP recovered some of the lost ground on the heels of a weaker USD opening this morning at US$1.2533. The US dollar remains under pressure as weaker services PMI and housing data highlighted concerns surrounding the US growth outlook and casts a pall over expectations for Fed policy beyond August. After a series of false starts, it appears a broader USD correction is forming. Our attentions remain closely aligned with global risks and we remain cautious in extending positions in the face of significant global headwinds.

Expected Ranges

  • NZD/USD: 0.6380 - 0.6520 ▼
  • NZD/EUR: 0.5950 - 0.6050 ▼
  • GBP/NZD: 1.9280 - 1.9590 ▼
  • NZD/AUD: 0.9050 - 0.9150 ▼
  • NZD/CAD: 0.8230 - 0.8330 ▲