NZD/USD bird's wings clipped by central bankers

• NZD/USD bleeding out as US dollar and yields firm.
• Hawkish Fed Powell keeps US yields running into the highest levels since 2018.

NZD/USD is closing the doors to North American traders down by over 1% on Thursday as Federal Reserve Chairman Jerome Powell told an International Monetary Fund panel that restoring price stability is "essential" and that a 50-basis point rate hike was "on the table" at the May Federal Open Market Committee meeting.

Consequently, the US 10-year yield rose 5.8 basis points to almost 2.89%, its highest level since December 2018 and the US dollar rebounded from the lows of the day of 99.81 to score as high as 100.63, bid into the Wall Street close. With inflation running roughly three times the Fed's 2% target, "it is appropriate to be moving a little more quickly," Powell added.

The S&P 500 and Nasdaq had already reversed course by the time Powell spoke, but they closed heavily with the Dow Jones Industrial Average also falling, losing 368.03 points, or 1.05%, to 34,792.76. The S&P 500 dropped 65.79 points, or 1.48%, to 4,393.66 and the Nasdaq Composite had lost 278.41 points, or 2.07%, to 13,174.65 but the end of the play, leaving a bearish outlook for Friday in Asia.

''The Kiwi is very sensitive to long end bond spreads (a reasonable proxy for terminal cash rate expectations), and the latter continue to rise in the US,'' analysts at ANZ Bank said. 

''NZ expectations have also risen following last week’s post-RBNZ retracement, but with 125bps of hikes already “in the tin” here (compared to just 25 in the US), and a peak OCR of 4.13% already priced in by the end of 2023, there’s arguably less scope for upside, which in turn could cap the NZD. Broadly speaking, it’s a picture of other CBs catching up on NZ’s erstwhile rate advantage.''

Meanwhile, in economic news, the US Initial Jobless Claims fell to 184,000 during the week ended April 16 from 186,000 in the previous week. The Philadelphia Federal Reserve's monthly manufacturing index fell to 17.6 in April from 27.4 in March. 

RBNZ in focus

Meanwhile, the inflation data from New Zealand underpinned the hawkish central bank rhetoric. The Reserve Bank of New Zealand has shown that it is keen to get the OCR to neutral as quickly as possible.

''Governor Orr reiterated this point at the IMF interview, noting that the balance of risks was weighted towards constraining inflation expectations in the medium term; he provided strong forward guidance for more rate increases in the coming quarters,'' analysts at Standard Chartered explained. 

''We now expect the rate hikes to be frontloaded, versus our previous call of 25bps hikes at each of the five meetings from April to October, which would take the OCR to 2.25%,'' the analysts added. ''Given the 50bps hike in April and our expectation of another 50bps hike in May, we drop the 25bps hikes in August and October, keeping our end-2022 OCR unchanged at 2.25%.''