NZD/USD pulls back from above 0.6800 as risk appetite sours, though hawkish RBNZ keeps kiwi underpinned

• NZD/USD has pulled back to near 0.6770 from earlier highs above 0.6800 as risk appetite deteriorates amid geopolitical concerns.
• But the kiwi is still the best performing G10 currency in the afterglow of Wednesday’s hawkish RBNZ meeting.
• NZD/USD continues to trade higher by about 0.6% on the day.

NZD/USD has pared a significant portion of its earlier gains and now trades back near the 0.6770 level, having at one point been as high as 0.6810, where it was up about 1.2% at the time. Risk appetite has taken a turn for the worse since the onset of US trade this Wednesday as a result of rising fears that Russia might be on the brink of invading Ukraine, weighing on risk assets like the kiwi. But the pair still trades with gains of about 0.6% on the day and remains the best performing currency in the G10, as the kiwi retains an underlying bid as a result of Wednesday’s more hawkish than anticipated RBNZ meeting.

To recap quickly, the bank lifted interest rates by 25bps to 1.0% as expected, disappointing some calls for a 50bps hike, but said it had been close to implementing the larger rate hike. The central bank also revised higher its projected interest rate path to a peak of 3.35% from 2.6% previously, much more than previously expected and announced plans to start actively selling down its New Zealand government bond holdings. “Given how much work the RBNZ believes it has ahead of it,” analysts at Westpac said, “the risk of a 50bp move at any given meeting remains live”.

The RBNZ’s hawkish shift arguably makes it the first G10 central bank to signal that it wants to take monetary policy into tight territory, i.e. interest rates well above the so-called “neutral rate”. That may help underpin NZD in the coming weeks/months, though an important FX market driver in the near-term is set to remain geopolitics and Fed tightening expectations. If Russia really does plan on invading Ukraine anytime soon, it might be a while before NZD/USD is able to get back above 0.6800 again. Rather, a move back under 0.6700 on risk aversion/USD safe-haven bid, seems more likely.