NZD/USD prints fresh 2022 highs

• Investors were in a risk-on mood, supporting the kiwi to fresh 2022 highs.
• Eyers are on the Fed and RBNZ with a focus on inflation risks.

NZD/USD is ending on Wall Street on firm footing and making fresh highs for the year, travelling from 0.6863 to a high of 0.6964, up 1.16% at the time of writing. The moves are despite recent comments from US Federal Reserve Chair Jerome Powell.

Powell yesterday dialled up the hawkishness of the Fed further, forcing bond yields to react. In addition, the USD remains a favoured safe haven currency and, as yet, the Russia/Ukraine peace talks have not yielded any tangible results. Traders are pricing in a 66.1% chance of a 50 basis point hike at the Fed's May meeting, according to CME's FedWatch Tool, up from slightly more than 50% a week ago.  As a result, DXY was up for the third straight day and trading near 99 the figure that outs the May 25 2020 high near 99.975 in focus.

However, the tide has turned on Tuesday. Investors were in a risk-on mood, as US stocks rose and dented some of the safe-haven appeal of the greenback, with equities getting a lift, in part, from bank shares on Fed rate hike expectations. ''The move was a tad surprising given talk of bigger Fed hikes and the growing concern locally about the prospect of a hard landing, but in the end, plain old “risk on” sentiment held the day,'' analysts at ANZ bank said.

''Amid a quiet week locally, the Kiwi was always going to dance to a global beat, and positioning could cap it down the track (speculative positioning swung from short to long last week according to CFTC – which helps in part explain the rally). But for now it is basking in glory (alongside AUD, CAD, and to a lesser extent NOK) as the 3 best performers in the G10 this year. That does square away nicely with moves in commodities.''

Inflation risks in focus

Meanwhile, earlier in the US session, St. Louis Fed President James Bullard repeated his call for the Fed to move aggressively on Bloomberg TV. Additionally, San Francisco Fed President Mary Daly said she believes the main risk to the economy is a worsening of already high inflation as oil prices climb due to the conflict in Ukraine and a disruption in supply chains from China's COVID-19 countermeasures.

Domestically, inflation expectations in New Zealand have risen aggressively over the past year and analysts at ANZ Bank said there’s a real risk that recent price spikes could cause expectations to become unanchored from the RBNZ’s 2% target for CPI inflation – especially as Omicron exacerbates already stretched domestic supply chains.

''The RBNZ already saw inflation expectations as the most significant risk in the February MPS, and now that risk of unanchored expectations is even stronger.

This is a key reason why we think the RBNZ should hike the OCR aggressively by 50bps in both April and May. It will hurt, but its considerably better than what they would need to do to the economy if inflation expectations continue to spiral further in the wrong direction.''