NZD/USD tests annual lows in 0.6220 region with buck in the ascendancy ahead of Fed’s expected 75 bps hike

• NZD/USD is eyeing a test of yearly lows in the low-0.6200s having erased earlier session gains. 
• The buck remains in the ascendency ahead of Wednesday’s expected 75 bps rate hike from the Fed. 
• NZD/USD has now dropped over 5.0% in the last eight sessions, with recession fears and China lockdowns woes also weighing.  

One day out from what is now expected to be a 75 bps rate hike from the Fed plus a new hawkish spin on longer-term interest rate guidance in face of the recent rise in US price pressures (as per last Friday’s US Consumer Price Inflation figures), the US dollar is back in the ascendency. NZD/USD has subsequently reversed earlier session gains that saw the pair attempt to claw its way back to the 0.6300 level and has fallen to test its earlier annual lows in the 0.6220s.  

At current levels, the pair is trading lower by about 0.5% and is on course for an eighth successive session in the red during which time it has shed over 5.0% and fallen back from above 0.6550. While inflation’s failure to subside as hoped and the subsequent build-up of Fed tightening bets is one of the key reasons for recent downside, it should also be noted that NZD/USD is also vulnerable to broader macro risk appetite given the kiwi’s status as highly risk-sensitive.  

Recession fears have been amping up in recent days, not least in wake of last Friday’s record bad US Consumer Sentiment data from the University of Michigan. Given New Zealand is a small open economy, it (and its currency) is seen as exposed to global growth conditions. China lockdown fears are also hurting the kiwi given its importance as a regional trade partner, as China continues to struggle to stamp out Covid-19 cases.