NZD Rises as US Dollar Rally Pauses

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After falling over 1% since late last week, the New Zealand dollar is in positive territory on Wednesday. NZD/USD is trading at 0.6785 in the European session, up 0.19% on the day.

ANZ says RBNZ to hike up to 3%

The RBNZ has embarked on a series of incremental interest rate hikes, starting with two hikes of 25 bps in the fourth quarter of 2021, bringing the current rate to 0.75%. How far will the bank go? The ANZ Bank had projected in October that the rates would reach 2% by April 2023, but now says that rates will reach 3% by that date. ANZ wrote that this updated forecast is not due to stronger growth, but rather surging inflation and the tight labour market. ANZ noted that inflation is galloping above 5%, as is inflation expectations, which means that an OCR of 3% would be “modest”. If more analysts adopt this view, expectations of higher interest rates should boost the New Zealand dollar.

Omicron continues to cause headaches for the New Zealand government. The number of Omicron cases remains quite low, but the country has imposed tight border controls to combat the virus. The government is now closing its border to New Zealand citizens and is trying to boost the vaccination rates. Still, it’s doubtful that the country can keep Omicron at bay, and a spike in cases could lead to renewed lockdowns which would hamper economic growth.

US Treasury rates continue to creep higher. After punching past 1.80% on Tuesday, a 2-year high, the 10-year rate has climbed to 1.89%. The 2% level, which is psychologically significant, is within striking distance. Higher US bonds, a reflection of market worries about accelerated Fed tightening, have boosted the US dollar against most of the major currencies.

NZD/USD Technical

• NZD/USD is putting pressure on resistance at 0.6912. Next, there is resistance at 0.6967
• 0.6844 is providing support. Below, there is support at 0.6721