NZD/USD hits fresh lows since June 2020 in mid-0.6300s as risk assets hammered

• NZD/USD was hammered on Monday in tandem with further downside in global risk assets and commodities.
• The pair dropped to fresh lows since June 2020 in the mid-0.6300s.
• Focus is on US CPI and NZ inflation expectations data later in the week which could impact central bank expectations.

NZD/USD was hammered on Monday in tandem with further downside in global risk assets and commodities as investors fretted about central bank tightening, sky-high inflation, slowing global growth, and developments that continue to worsen these economic themes, such as the ongoing Russo-Ukraine war and lockdowns in China.

The pair was last trading lower by more than 1.0% in the 0.6330s, its lowest levels since June 2020 and more than 3.5% below last Thursday’s highs in the upper 0.6500s. Since hitting multi-month highs just over one month ago to the north of the 0.7000 level, the kiwi has depreciated by nearly 10%.

Expectations that the RBNZ will lift rates much more aggressively and maintain a yield advantage over the Fed have done little to help shield the kiwi from the negative impact of deteriorating global macro conditions in recent weeks. The RBNZ is expected to lift interest rates by 50 bps to 2.0% later this month and money markets are pricing for a 4.4% terminal rate from the RBNZ, well above the market’s current terminal rate pricing for the Fed around 3.5%.

Some analysts think this RBNZ pricing is excessive, which explains why it is failing to support the kiwi to a degree. “We believe the Kiwi (money) market has gone too far, and rates will most likely fall following the RBNZ's decision in a few weeks,” said Jarrod Kerr, chief economist at Kiwibank. That suggests further downside risks to the kiwi beyond global macro factors.

The main event being watched by FX markets this week is Wednesday’s release of US Consumer Price Inflation data, which should show a modest easing of price pressures. Whether this will be enough to ease the downbeat tone to broader risk appetite remains to be seen. NZD/USD traders will also be watching the release of an RBNZ survey of inflation expectations on Thursday.

“Inflation expectations running well above the targeted 2% is a threat to the RBNZ's credibility as an inflation-fighting central bank… said Kerr, who concluded that “any further push higher in expectations will only fuel the RBNZ's resolve to tighten aggressively”. If the data is interpreted as having a hawkish read across to RBNZ policy, that could offer NZD/USD some momentary support. But any rallies back to resistance in the 0.6400 area may be tempting for sellers to jump back in.