NZD/USD: All Eyes On Reserve Bank Of New Zealand

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The New Zealand dollar continues to rally. In the European session, is trading at 0.5746, up 0.43%.

RBNZ likely to deliver 0.50% hike

The Reserve Bank of New Zealand holds a meeting on Wednesday. The RBNZ has been aggressive with its rate tightening and is expected to raise rates by 0.50%, which would bring the cash rate to 3.50%, the highest since 2015. Governor Orr has hinted that the rate cycle could be coming to a close soon, but that is still more work to do to tame inflation. In Q2, rose to 7.3%, up from 6.9% in Q1. The economy has performed well, with rising 1.7% in Q2, along with a strong labour market and solid wage growth. This means that Orr can continue to raise rates above 4.0% in the knowledge that the economy is strong enough to handle additional rate hikes.

September was a disaster for the New Zealand dollar, which plunged 6.5% and fell to its lowest level since March 2020. With the taking a breather, NZD/USD has rebounded this week, with gains of 2.70%. The volatility could well continue, and the New Zealand dollar is likely to face more headwinds in the short term.

First, the risk-related currency has been hit hard as risk apprehension has soared. The war in Ukraine has escalated and the energy crisis facing Western Europe could tip many countries into recession this winter. China’s economy has been slowing down, which means less demand for New Zealand exports.

Second, the Federal Reserve remains in aggressive mode and is committed to curbing inflation, even if that results in a recession. US Treasury yields have been on an upswing, propelling the US dollar higher against most of the major currencies.