NZD/USD bulls move in early doors against a risk-off backdrop

• NZD/USD is holding up despite the strength in the US dollar, with the kiwi firm in the session so far. 
• Focus is on the Fed and US data amid Chinese covid risks. 

At 0.6617, during the time of writing, NZD/USD is in the green and firm, but sticking to a 0.6611/21 range on the day so far following a turbulent start to the week amid the spread of covid-19 in China. The US dollar has thrived whereas the yuan has fallen, and risk sentiment along with it, weighing on commodities and risk-FX. 

''The Kiwi followed the global FX trend and weakened against the USD. Concerns over broadening COVID restrictions in China and an associated sharp fall in equity markets drove the fall,'' analysts at ANZ Bank said.

''Ahead of the May FOMC meeting, it is difficult to see the strength in the USD waning much. FOMC members are now in blackout and the clear guidance is that a series of 50bps fed funds rate hikes are necessary. That guidance contrasts with growing downside growth risks outside of the US and is reflected in the current USD strength.''

Meanwhile, from the domestic front, the recent Consumer Price Index showed that prices rose 1.8% in the March quarter. Analysts at Standard Charted said that they now expect the Reserve Bank of New Zealand (RBNZ) to hike the official cash rate (OCR) by 50bps at the May meeting and another 25bps in July to bring the OCR to 2.25%, slightly above neutral (estimated at 2.0%).

''We now expect the rate hikes to be frontloaded, versus our previous call of 25bps hikes at each of the five meetings from April to October, which would take the OCR to 2.25%,'' the analysts argued, adding:

''Given the 50bps hike in April and our expectation of another 50bps hike in May, we drop the 25bps hikes in August and October, keeping our end-2022 OCR unchanged at 2.25%.''

''We think the RBNZ will find it hard to tighten significantly beyond neutral because of the challenges ahead, including heightened geopolitical tensions (and the resulting hit to sentiment), monetary policy tightening, and lingering pandemic risks.''

US data in focus

For the week ahead, during the Fed's blackout period, the focus will be on US data including Real Gross Domestic Product and Core PCE.

''GDP likely slowed sharply in the first quarter Q1 following a significant increase to 6.9% AR in Q4 from 2.3% in Q3. As was the case last quarter, inventories will play a large role though they will be a drag instead. That said, domestic final sales likely continued to strengthen on the back of firming consumer spending. The inflation parts of the report will likely show acceleration,'' analysts at TD Securities said.