NZD/USD holding above 0.6800 amid weaker post-Fed US dollar

• NZD/USD surged back above 0.6800 on Thursday, as the dollar weakens post-Fed.
• A smaller than expected decline in Q3 NZ GDP didn’t seem to impact FX markets much.

NZD/USD has been choppy over the last two sessions, in fitting with a broader uptick in volatility across G10 FX markets. On Wednesday, in wake of the Fed’s hawkish policy announcement that the pace of the QE taper would be doubled and there could be as many as three rate hikes in 2022, NZD/USD lurched as low as 0.6700. The pair has since surged as high as the 0.6830s, though has eased back to around the 0.6800 level.

While most agree the Fed on Wednesday was hawkish, with Fed Chair Jerome Powell painting a bullish picture for the economy in 2022, FX market participants have seemingly been closing out their bullish dollar positions. Some have referred to the market reaction as “buy the rumour (of Fed hawkishness), sell the fact”. Whatever the cause, USD weakness on Thursday is providing a lift to the majority of its G10 counterparts, NZD included, hence how NZD/USD has recovered back to the north of the 0.6800 level.

A smaller than expected decline in economic activity in New Zealand in Q3, as revealed by a release at the start of Thursday’s Asia Pacific session, is good news for the RBNZ, but does not seem to have impacted FX markets. The economy contracted just 3.7% QoQ in Q3 amid strict lockdowns for much of the quarter in key city Auckland. This was less than the 4.5% QoQ decline markets had expected and well below the decline forecast by the RBNZ. NZD on Thursday is up about 0.3% versus the US dollar, a similar margin to the gains seen in AUD, CHF and JPY and less so than the EUR (+0.4%) and sterling (+0.6%).