NZD/USD dips under 0.6900, weighed by strong dollar, dovish RBNZ hike

• NZD/USD dropped below 0.6900 in recent trade and is the market G10 underperformer on the day.
• The pair was sent lower overnight by a dovish RBNZ from the RBNZ.

NZD/USD has pushed below 0.6900 in recent trade as the wave of selling pressure on the kiwi shows no sign of abating just yet. Now that the 0.6900 level has been broken, bearish technicians will eye support in the form of the early October/last September lows in the 0.6860-0.6880 region. Some technical buying/profit-taking on recent shorts may be incentivised around this area, as NZD/USD’s Z-score to its 200DMA (i.e. the number of standard deviations away from its 200DMA) would be about -2.0. In the past, this has been a signal of near-term consolidation.

There has been a ramp-up of pandemic-related fears in global markets on Wednesday as speculation about a full-scale lockdown and even potential vaccine mandate in Germany mounts and the outlook for the Eurozone economy more broadly darkens. This has been supporting safe-haven currencies like the US dollar and yen, explaining some of NZD/USD’s recent downside.

Kiwi underperformance

The reason for the kiwi’s marked underperformance when compared to other risk-sensitive G10 currencies on Wednesday is a disappointed market reaction to the latest RBNZ policy announcement during Asia Pacific trading hours. NZD/USD dropped from above 0.6950 to 0.6920 in the immediate aftermath of the bank’s announcement that it would hike interest rates by 25bps to 0.75%, before heading lower in subsequent trade as already detailed.

Some market participants had been expecting the bank to hike rates by 50bps, so the initial market reaction reflected an unwind of these hawkish bets. Meanwhile, despite the RBNZ upping its 2023 official cash rate (OCR) forecast to 2.3% from 1.7% (an upgrade was expected), this wasn’t as hawkish as NZD short-term interest rate markets had been priced for.

The RBNZ said it would take a cautious approach to further tightening for now, which MUFG thinks reflects “concerns over the high level of indebtedness that means households will now be a lot more sensitive to rate hikes than before”. MUFG says the 14bps drop in New Zealand government 2-year bond yields on Wednesday is “understandable given what is priced into the rates market in New Zealand… (and) the adjustment could have further to go over the short-term which could mean further NZD weakness versus the US dollar from here”.