CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 81.76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Pepperstone logo
Pepperstone logo
NZD

RBNZ U-Turn Dents The Kiwi Dollar

Michael Brown
Senior Research Strategist
May 25, 2023
In rapid, and unexpected, fashion, the Reserve Bank of New Zealand (RBNZ) have pivoted from being one of the most hawkish G10 central banks, to one of the most dovish. Subsequently, the Kiwi dollar has lurched sharply lower, as the rates curve underwent a dovish repricing, and front-end New Zealand bonds rallied hard.

As expected, and as priced by money markets, the RBNZ raised the Official Cash Rate (OCR) by 25bps this week, taking the OCR to its highest level since 2008 at 5.5%. However, this was the only part of the decision that was in line with prior expectations.

Preview

Firstly, the vote split had a dovish bent, with 2 of the 7 member MPC dissenting in favour of leaving rates unchanged, a break from the unity seen thus far in the tightening cycle. Of more importance, the RBNZ effectively declared the hiking cycle to be over, believing that enough tightening has now been delivered to tame price pressures, and return inflation to target. Furthermore, the RBNZ’s own economic forecasts pencilled in rate cuts as soon as the second half of 2024, despite also indicating that a mild recession will likely be experienced in mid-2023.

This was substantially more dovish than markets had been expecting, with the OIS curve pricing at least one additional hike (beyond that delivered this week), before expecting rates to remain on hold. Unsurprisingly, the curve has undergone a significant dovish repricing since, with traders marking their bets to the RBNZ’s own projections, albeit expecting a slightly more aggressive pace of loosening than the central bank itself.

Preview

This dovish shock, and subsequent repricing, had a predictably violent impact on the NZD. NZD/USD notched its biggest one-day decline since the early days of the pandemic on Wednesday, while also breaking a number of key technical levels – tumbling below all of the 50-, 100-, and 200-day moving averages, in addition to cracking under the 0.61 handle which has represented the bottom of the range traded since early-March.

Preview

Given that the RBNZ have somewhat demolished the bull case for the Kiwi with their surprisingly dovish decision, and with the aforementioned technical levels breaking, playing from the short side is likely to become increasingly popular. The bears are likely to now be eyeing the 0.60 figure, both due to its psychological importance, and this being the 50% retracement of the rally from Oct 22 to Feb 23.

Against its antipodean peer, the NZD has also come under pressure, seeing AUD/NZD reclaim its 50-day moving average for the first time since late-April.

Preview

Once again, we see policy divergence at work here, with the RBA having abandoned their pause at the May meeting, reinstating a tightening bias, and markets pricing a roughly 50/50 chance that the RBA deliver at least one more rate hike. AUDNZD bulls are likely now to be targeting the 100-day moving average at 1.0810, a break of which would add further momentum to the move.

The material provided here has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Whilst it is not subject to any prohibition on dealing ahead of the dissemination of investment research we will not seek to take any advantage before providing it to our clients.

Pepperstone doesn’t represent that the material provided here is accurate, current or complete, and therefore shouldn’t be relied upon as such. The information, whether from a third party or not, isn’t to be considered as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product or instrument; or to participate in any particular trading strategy. It does not take into account readers’ financial situation or investment objectives. We advise any readers of this content to seek their own advice. Without the approval of Pepperstone, reproduction or redistribution of this information isn’t permitted.