NZD/USD recovers few pips from multi-month low’ lacks follow-through ahead of US data

• NZD/USD slides to a near four-week low in reaction to the RBNZ’s decision to maintain the status quo.
• The Fed’s hawkish view, along with elevated US bond yields, underpin the USD and exert pressure.
• The risk-off environment might further contribute to driving flows away from the risk-sensitive Kiwi.

The NZD/USD pair attracts some intraday sellers on Wednesday and drops to a near four-week low, around the 0.5870 region after the Reserve Bank of New Zealand (RBNZ) announced its policy decision. Spot prices, however, manage to bounce back to the 0.5900 round figure during the early part of the European session, though any meaningful recovery now seems elusive.

The RBNZ decided to keep its cash rate target unchanged at 5.50%, as was widely anticipated and offered no fresh clues that it might raise interest rates again. In the accompanying monetary policy statement, the central bank noted that demand growth in the economy continues to ease and higher interest rates are reducing inflationary pressure as required. This, in turn, suggests that the RBNZ might have ended the rate-hiking cycle and undermined the New Zealand Dollar (NZD), which, along with a bullish US Dollar (USD), exerts pressure on the NZD/USD pair.

The USD Index (DXY), which tracks the Greenback against a basket of currencies, stands tall near its 11-month peak and remains well supported by growing acceptance that the Federal Reserve (Fed) will stick to its hawkish stance. Moreover, the recent comments by several Fed officials backed the case for at least one more rate hike by the end of this year. Adding to this, the US JOLTS report released on Tuesday pointed to a still-tight labour market and brings wage inflation back on the agenda, which should allow the Fed to keep interest rates higher for longer.

The outlook pushes the yield on the benchmark 10-year US government bond to its highest level since 2007 and underpins the Greenback. Meanwhile, an extended selloff in the US fixed-income market, along with concerns about economic headwinds stemming from rapidly rising borrowing costs and perspective worries about China's ailing property sector, continues to weigh on investors' sentiment. This is evident from a generally weaker tone around the equity markets, which further benefits the safe-haven buck and drives flows away from the risk-sensitive Kiwi.

Traders, however, seem reluctant to place aggressive bearish bets around the NZD/USD pair and prefer to wait for the release of the US macro data – the ADP report on private-sector employment and the ISM Services PMI. This, along with the US bond yields and the broader risk sentiment, will drive the USD demand and produce short-term trading opportunities around the major. The market focus, however, will remain glued to the closely-watched US monthly employment details – popularly known as the NFP report – due on Friday.

Technical levels to watch