NZD/USD treads water in 0.6950 region as RBNZ policy decision looms

• NZD/USD is a tad lower on Tuesday but consolidating in the 0.6950 area ahead of Wednesday’s RBNZ meeting.
• The bank is expected to hike interest rates by at least 25bps to 0.75%.

NZD/USD has seen consolidative trading conditions over since the start of the European trading session and into US hours, with the pair currently subdued just to the south of the 0.6950 mark that it slipped below in early APac trade. On the day, NZD/USD trades with losses of about 0.2%, in line with the losses being observed by most other non-US dollar G10 currencies versus the buck. That takes the pair’s losses since the start of the week to about 0.7%, putting the currency second from the bottom of the weekly G10 performance table, with the yen the worst performer.

To the upside, there is notable resistance in the 0.6980 area and at 0.6970, an area that may be an attractive entry for the sellers. Meanwhile, the main area of downside support is the last-September lows around 0.6860.

RBNZ rate decision coming up

The losses in NZD come despite expectations that the RBNZ will hike interest rates for a second consecutive meeting on Wednesday, as it continues to pull back stimulus from an economy showing signs of overheating. Most economists expect the RBNZ to hike interest rates by 25bps to 0.75% on Wednesday. New Zealand Bank Bill futures for December 2021 trade close to 99.00, implying a 50bps move, a move which a minority of economists are predicting. If the bank does opt to disappoint the expectations of the hawkish minority by opting for a 25bps rate rise, some analysts suggest it may issue hawkish forward guidance to compensate.

Ahead of the meeting, the pair is likely to trade water. Westpac remains bullish on the pair in the medium-term, given that “global risk sentiment remains elevated, and NZ-US yield spreads remain attractive, while NZ commodity prices are rising”. The bank continues “to watch for this decline to run its course, and target a return to the Feb high of 0.7465+ by Q1 next year”. ANZ are more cautious, saying that (with regards to Wednesday’s RBNZ meeting) “the market has gotten itself all tied up in knots expecting a super-hawkish tone” and that “downside risks are emerging and higher swap/mortgage rates have already done the heavy lifting”. “Could the Kiwi have had its best days for 2021?” they ask.