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NZD surges higher as Fed dispel hopes for faster rate hikes

Thursday 5 May, 2022

Daily Currency Update

The New Zealand dollar surged back through 0.65 US cents on Wednesday, buoyed by a broader USD correction following the FOMC policy update and press statement. Having tracked sideways through the domestic session the NZD lurched off intraday lows at 0.6425, surging through 0.65 and 0.6550 to touch intraday highs at 0.6552. There were few surprises in the FOMC’s policy update as policymakers elected to raise rates by 50 basis points and forecast the beginning of balance sheet reduction. Fed Chair Powell offered a hawkish assessment of current conditions highlighting elevated inflation and a strong labour market as supportive of further front-loaded rate hikes in the months ahead. Powell however disappointed investors more optimistic tightening expectations, dispelling suggestions at 75 basis point rate hike would be issued in the near term. Rates fell sharply on these comments with 2-year and 10-year rates shifting lower while domestic rates surged to multi-year highs with the terminal OCR price lifted to 4.25%. With a major risk event now behind us and investors correcting US rate expectations there is scope for more NZD upside should headwinds ease.

Key Movers

The US dollar weakened across the board through trade on Wednesday as markets reacted to Jerome Powell’s comments dispelling hopes for a 75-basis point rate hike. The Dollar Index fell almost 1% as the rate curve steepened following a correction in 2-year rates as investors adjusted expectations for front-loaded Fed rate hikes. As anticipated the Fed raised rates by 50 basis points and announced the beginning of balance sheet reduction yet it was the removal of the possibility of a 75 basis point hike that moved currencies forcing the USD lower and allowing the euro to push back above 1.06, the GBP to surge back above 1.26 and the JPY force the USD back below 130. With a major risk event now behind us, our attentions turn to the Bank of England policy meeting. With a 25 basis point hike prices in our focus lies with the policy guidance and future rate expectations. While headline inflation closes in on 10%, the domestic economy lacks momentum and an aggressive adjustment in rates could be too much, further elevating rising living costs and tipping the economy into recession.

Expected Ranges

  • NZD/USD: 0.6420 - 0.6590 ▲
  • NZD/EUR: 0.6080 - 0.6220 ▲
  • GBP/NZD: 1.9080 - 1.9520 ▼
  • NZD/AUD: 0.8980 - 0.9080 ▼
  • NZD/CAD: 0.8250 - 0.8390 ▲