NZD rallies as all eyes turn to RBNZ policy update
Wednesday 13 April, 2022
Daily Currency UpdateThe New Zealand dollar rallied through trade on Tuesday bouncing off lows approaching 0.68 US cents following softer US inflation data and optimism around China’s COVID-19 response. Reports China will start dialling back lockdown laws as the focus shifts toward the infection rate within the community rather than a COVID-19 zero policy coupled with the promise from key policymakers that measures would be taken to support the economic recovery helped bolster demand for commodities. Having extended back above 0.6850, the NZD found added support in a softer than anticipated US inflation print. While headline CPI rose in line with estimates, US core CPI inflation surprised to the downside rising only 0.3% in the month of March, well short of the 0.5% increase expected. The softer than anticipated print prompted a swift reaction across bond markets forcing 10-year treasury rates off highs above 2.8% yesterday to 2.72% this morning, driving the NZD toward intraday highs just shy of 0.69 US cents.
Our focus now turns to the RBNZ and their latest policy meeting today. Markets have priced in an 80% chance of a 50-basis point rate hike, however, with economic growth stalled and inflation pressures rising policymakers face a difficult decision. Raising rates to fast could add a handbrake to the economic recovery and further hamper future growth, while a sluggish path to monetary policy normalisation could accelerate inflation pressures. With the market divided over a 25- or 50-point hike, we expect some volatility in NZD value following the rate decision.
Key MoversThe NZD and AUD outperformed on the day as the USD gave back some ground amid the correction in 10-year bond rates while the euro was the day's big loser. The single currency eyed a break below 2-year lows toughing 1.0830 as reports peace talks between Ukraine and Russia had stalled. Russian President Vladimir Putin was reported as saying peace talks have reached a “dead end” and that Russia’s military operation would continue. With any hope of a near-term agreement for peace now quelled energy and supply chain pressures on Europe are expected to grow, placing an even greater strain on inflation expectations and hopes for a broader economic recovery.
Our attentions today turn to the Bank of Canada policy decision where we expect they will raise rates by 50 basis points to 1% while UK CPI inflation is expected to increase and reach a 30 year high near 7%.
- NZD/USD: 0.6780 - 0.6930 ▲
- NZD/EUR: 0.6230 - 0.6420 ▲
- GBP/NZD: 1.8820 - 1.9130 ▼
- NZD/AUD: 0.9120 - 0.9250 ▲
- NZD/CAD: 0.8590 - 0.8720 ▲