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RBNZ set to scale back its jumbo rate hikes


The Reserve Bank of New Zealand (RBNZ) has raised the official cash rate (OCR) by a huge 75 basis-points (bps) in November 2022, and a total of 400bps since October 2021, on the back of surging inflation and a sharp decline in the New Zealand dollar.

However, following a decline in inflation expectations last week, the Bank is expected to slow down its rate hikes to a 50bps increase in the upcoming meeting on Wednesday, and bring the OCR to 4.75%.  

Inflation hits a peak

New Zealand’s CPI runs at 7.2% annually in the fourth quarter, lower than an expected 7.5% by the RBNZ, but unchanged from the third quarter, which is the highest seen in 1991, with the consumer price of food rising 11%. But there are signs of peaking inflation as the recent RBNZ survey shows that the benchmark 2-year inflation expectation for the first quarter falls to 3.30% from the prior quarter of 3.62%. The cooling inflation expectations will most likely promote the Reserve Bank to slow down its rate hikes going forward, but it will not change the course of hiking rates.

Another economic gauge of the RBNZ, New Zealand labour markets softened in the fourth quarter, which also strengthens the odds for a slowdown in rate hikes. The unemployment rate rose to 3.4% in the final quarter from 3.3% in both the third and the second quarter, and 3.2% in the first quarter of 2022.

The NZD Traded Weighted Index (TWI) rebounded from a three-year low of 67 in mid-October to 73 in early December, or a 9% jump. A strengthened New Zealand dollar may have also helped to lift inflationary pressure by reducing costs on imports.

Implications for the dollar and New Zealand stocks

The instant response of the New Zealand dollar and stock markets will be uncertain since a 50-bps rate hike is widely expected. The RBNZ’s guidance on further rate hike path will be key to steer market movements. The Bank may soften its tone on further rate hikes but remain cautious as inflation is sticky and the labour market stays tight. Globally, the major impact on the local currency will be the US dollar’s movement, which is mainly driven by the US Fed’s decision on rates.

The recent rebound in the US dollar could retrain commodity currencies’ upside momentum.  As for the New Zealand stock market, a less hawkish approach will help relieve the risk sentiment, but it may continue tracing the global market trends. The NZX retreated as the recent earnings reports from major companies are generally not rosy due to the impact of hefty inflation and rising rates in the past year. Globally, Wall Street paused the new year rally in February due to strengthened odds for Fed’s “higher for longer” rate hikes.

In a longer timeframe, China’s reopening could relieve the supply chain issues and improve demand outlooks, which plays a key role in the global economy in 2023. The New Zealand dollar and the local equities may take a policy tailwind coming into the second half of the year when the Fed starts pausing rate hikes and lifts sentiments.

Technical analysis

NZD/USD – A potential double-top pattern

Source: CMC Markets NG as of 21 February 2023 (Click to enlarge the chart)

The pair potentially forms a double-top pattern, facing downward pressure with near-term support around the 200-day moving average of 0.6192. A breakdown below this level may take the pair to 0.6017 (Fib. 50% retracement). Another bearish indication is that MACD has fallen below the mid-line, potentially entering a downtrend.

On the flip side, a breakout above the key resistance of 0.6384 may take it to the February high of 0.6520. 

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