NZD/USD set to end session more than 1.0% lower after RBNZ disappoints, dollar strengthens

• NZD/USD sold off relentlessly on Wednesday, dropping from above 0.6950 to lows in the 0.6850s.
• The pair was weighed by a dovish RBNZ hike and a broad strengthening of the US dollar.

NZD/USD faced relentless selling pressure on Wednesday. The pair hit highs above 0.6950 in early Asia Pacific trade, but by midway through the US trading session, it had dropped all the way to the 0.6850s. At current levels around 0.6870, the pair is down on the day by about 1.1%, making the kiwi far and away the worst performing G10 currency on the day.

Selling pressure began during Asia Pacific hours after the RBNZ delivered a more dovish than expected 25bps rate hike. Selling continued in early European trade, though this was more to do with safe-haven demand boosting the US dollar amid further concerns about the European Covid-19 situation. Then US macro forces came into play as the US session began, with strong labour market, inflation, consumption and GDP data as well as hawkish comments from Fed member Mary Daly further boosting the buck.

More recently, the FOMC minutes of the 3 November meeting were released and emphasised the hawkish shift already taking place on the bank even prior to the release of the hotter than expected October Consumer Price Inflation report on 10 November. The US dollar was already enjoying decent gains against most of its G10 counterparts by the time the minutes were released and so FX market trade has since been more consolidative. Recent commentary from RBNZ Governor Adrian Orr, who noted that it would be better for the bank to take small steps when raising the OCR in order to observe the development of the economy, was ignored.

From the kiwi’s perspective, the Thanksgiving holiday in the US, which means that markets there are shut and then only partially open on Friday, is coming at the perfect time to stop the rot. In the absence of US market participants for (pretty much) the rest of the week, FX markets are likely to trade with less conviction, which could hand NZD an opportunity to rebound a little. NZD/USD’s Z-score to its 200-day moving average at current levels is close to -2.00, a level which, when hit, has in recent months been a good indicator of consolidation or a rebound. Moreover, NZD/USD is approaching oversold territory, with an RSI of 32. If that dips below 30, that could trigger some profit-taking.