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RBNZ transparency drives NZD toward key level of resistance

NZD - New Zealand Dollar

The New Zealand dollar jumped through resistance at 0.7250 to test a key technical handle on Wednesday, buoyed by the transparent and detailed RBZ monetary policy statement. As expected, policy makers opted to maintain the current program of accommodative monetary policy, while acknowledging the improvements in domestic labour market performance, rising inflationary pressures and a stronger global macro-economic outlook. The surprise came from the Bank’s new OCR projections. The RBNZ projects raising rates from the middle of next year, advancing base line interest rates by 150 basis points over 2 years. While markets have already penciled in a normalisation in interest rates from May next year, the hawkish shift in rhetoric and transparency in forward guidance prompted investors to chase NZD gains toward resistance at 0.7315. The NZD failed to break above the January high and edged back below 0.73 overnight amid a stronger USD. With near term pressures weighing on NZD upside we expect the currency to continue to bounce between support and resistance until a catalyst driving renewed risk sentiment emerges.

Key Movers

The USD dollar strengthened across the board on Wednesday amid early month end rebalancing ahead of the Memorial Day long weekend. The dollar index found support in a weaker euro amid a divergence in 10-year bond yields. The US 10-year rate remained largely flat between 1.55 and 1.58, while Germany Bunds fell 13 basis points as markets adjust expectations the ECB might begin tapering bond purchases in June. Commentary from ECB board members quashed any hope the Bank would reduce bond purchases, suggesting “conditions do not justify reducing the rate of purchases…we need to see a sustained increase in inflationary pressures before we consider tapering.” The euro slipped back below 1.22 touching intraday lows at 1.2185, while the great British pound again struggled to break outside a 1.41-1.42 handle. Despite renewed USD demand the CNY continued its advance, pushing through 6.40 to touch 6.39, after the PBOC showed little concern with the recent appreciation, seemingly content to allow market fundamentals to drive further gains.

Our attentions turn now to Q1 GDP data ahead of Friday’s all important PCE inflation print.

Expected Ranges

NZD/USD: 0.7220 - 0.7315 ▲

NZD/EUR: 0.5880 - 0.6020 ▲

GBP/NZD: 1.9220 - 1.9760 ▼

NZD/AUD: 0.9290 - 0.9450 ▲

NZD/CAD: 0.8710 - 0.8890 ▲