The New Zealand dollar has steadied on Tuesday, after a plunge a day earlier. In the European session, NZD/USD is trading at 0.6120, up 0.13%.
RBNZ expected to deliver 50bp hike
The Reserve Bank of New Zealand holds its policy meeting on Wednesday, and all indications point to a 50-bp hike, which would be the third such increase in as many meetings. This is a very aggressive rate-tightening cycle and would bring the cash rate to 2.50%. The central bank is playing catch-up with the inflation curve and is determined to wrestle down spiralling inflation, which has climbed to 6.9%, a 30-year high.
There are concerns that the central bank could over-tighten and rather than a soft landing, the economy could tip into a recession. With inflation and inflation expectations viewed by the RBNZ as public enemy number one, the price of a recession would be painful but one that central bank policymakers are willing to pay. Interest rates are expected to continue to rise, with another 50bp hike likely in August.
The tightening cycle has not brought about a peak in inflation, but there are unmistakable signs that the economy is slowing down. Business and consumer confidence indicators point to a weakening in confidence, which could translate into lower spending in the private sector. Homeowners are paying higher mortgage rates due to the rise in rates, which has dampened the housing market.
The New Zealand dollar was pummelled on Monday, as NZD/USD fell by a massive 1.24%. The US dollar was broadly higher as a strong non-farm payroll report raised expectations that the Fed will deliver a second straight 75 bp hike at the June meeting. If Wednesday’s US inflation report shows that CPI continues to accelerate, it would likely cement a 75bp move by the Fed.
- NZD/USD is testing resistance at 0.6125, followed by 0.6189
- There is support at 0.6062 and 0.5998
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