NZD/USD: RBNZ hawkish communication to be Kiwi supportive – ANZ

The Reserve Bank of New Zealand (RBNZ) hiked the official cash rate by 75 bps to 4.25%. FX markets responded well to the news, with the Kiwi spiking. Economists at ANZ Bank expect the decision to support the NZD.

Recession fears may weigh on the Kiwi

“Markets went into today’s decision pricing in favour of a 75 bps hike, and they got it. What they were unprepared for was the magnitude of the upgrade to the RBNZ’s OCR track, which now peaks at 5.5%. The RBNZ’s track is a technical projection, and it’s not supposed to signal that policy is on a pre-set path, but if we try to back-solve what is implied at each decision by the track, it points to another 75 bps hike in February, followed by 25 bps hikes in April and May.”

“We think this decision will ultimately be NZD supportive on the grounds that the RBNZ’s track points to the OCR coming to rest above where markets expect the US Fed Funds rate to peak (markets are pricing in a 5.08% peak).”

“Getting on top of inflation should also be positive for the NZD in that it should reduce the need for markets to price in an inflation discount to the real exchange rate. However, this decision will stoke recession fears, and that may weigh on the Kiwi.”