The New Zealand dollar against the US currency is plummeting. In just a few hours, the pair has dropped more than 150 pips in response to the outcomes of the May meeting of the RBNZ. Despite the central bank raising the interest rate by 25 basis points, the "kiwi" came under significant pressure as the central bank's rhetoric took on a "concluding" character. As a result, after a rapid rise towards the 0.63 level, the NZD/USD pair declined to the support level of 0.6100 (lower Bollinger Bands line on the daily chart).
Sellers could not impulsively overcome this price barrier, but the bearish sentiment still prevails for the pair. The New Zealand dollar has lost an important trump card today, which had been supporting it for many months.
Leading up to the May meeting of the Reserve Bank of New Zealand, most experts were confident that the central bank would not maintain an aggressive pace of rate hikes and would only increase it by 25 basis points. Justifying their position, experts pointed to the latest inflation release, which reflected a slowdown in inflation in the country. The report came out in the "red zone": the consumer price index in the first quarter decreased to 6.7% annually (this level was exceeded only in the fourth quarter of 2021). In quarterly terms, the consumer price index also entered the "red zone": with a growth forecast of 1.5%, it decreased to 1.2% in the first quarter.
Considering such dynamics, the market was prepared for the RBNZ to lower the pace of rate hikes to 25 basis points. For example, 80% of economists surveyed by Reuters predicted a 25-point rate increase.
On the one hand, the New Zealand central bank implemented the basic, widely expected scenario. On the other hand, the RBNZ made it clear that the May hike would be the "final chord" of the current cycle of tightening monetary policy parameters.
According to the central bank's statement, the interest rate has already peaked. The RBNZ forecasts that the OCR will remain at its current level until the third quarter of next year, after which it will likely start to decrease. Additionally, the Reserve Bank predicted a moderate recession in New Zealand during this year's second and third quarters.
Consequences of the May meeting
Commenting on the outcomes of the May meeting, the head of the Central Bank, Adrian Orr, stated that inflation in the country has already peaked, so a downward trend will be observed from now on. He also noted that the decision to raise the rate was "difficult" for the central bank. This remark is also confirmed by the protocol of today's meeting (which was also published). The document states that the regulator members considered the possibility of keeping the rate at 5.25%, but after lengthy discussions, they decided to raise it by 25 basis points. In other words, the RBNZ was ready to announce a pause at today's meeting.
It should be noted that the Reserve Bank of New Zealand "knows how to surprise," although this quality does not characterize the central bank positively. Weak communication usually provokes increased volatility, stirring up the markets. Nevertheless, the fact remains. For example, in the summer of 2019, the New Zealand regulator significantly shook the markets by unexpectedly cutting the interest rate by 50 basis points. At that time, the financial world felt the effects of the trade war between the US and China. The RBNZ became the first among the central banks of key countries worldwide to opt for monetary policy easing, followed by the Federal Reserve, the ECB, the RBA, and some other regulators.
This year, the New Zealand central bank is acting more cautiously. After announcing the end of the tightening cycle of monetary policy parameters, it raised the rate by 25 basis points, so to speak, as a "painkiller." Nevertheless, the decision in May sharply contrasts with the hawkish statements made at the previous April meeting.
Conclusions:
The established fundamental background contributes to the further development of the downward trend. A corrective upward pullback is possible only through weakening the US currency. However, the greenback feels quite confident against the backdrop of the negotiation saga regarding the US debt ceiling increase. Therefore, the NZD/USD pair will likely continue setting new price lows in the medium-term perspective.
From a technical point of view, the NZD/USD pair on the D1 timeframe is below all the lines of the Ichimoku indicator (including the Kumo cloud) and is currently testing the lower Bollinger Bands line, corresponding to the level of 0.6100. The next targets of the downward movement will be the levels of 0.6050 (lower Bollinger Bands line on the W1 timeframe) and 0.5970 (lower boundary of the Kumo cloud on the weekly chart).