FX.co ★ NZD/USD: kiwi rally stalls amid US dollar growth

The New Zealand dollar remained stable after the Reserve Bank of New Zealand (RBNZ) raised the interest rate for the first time in 7 years at the recent meeting. However, the steadily rallying US dollar is preventing NZD from holding its current position.

The New Zealand dollar is struggling not to slope to low levels. The pullback of the kiwi began after the RBNZ meeting when the regulator launched a new tightening policy. The Central Bank raised the Official Cash Rate (OCR) by 25 basis points (bps) for the first time in 7 years. Thus, it signaled a further tightening of monetary policy, which aims to overcome inflationary pressures.

The 25 basis points rate hike not only kicked off the tightening measures but also paved the way for an increase to 50 basis points. The beginning of the tightening policy was planned in August, but it was postponed due to the outbreak of the delta variant. The RBNZ meeting met market expectations. The key rate rise did not exceed 0.25% (with the prospect of an increase to 0.50%), and regulator representatives said that COVID-19 would not impact the medium-term forecast.

The New Zealand dollar collapsed sharply against the US dollar (to 0.6930), but rose right after the rate was announced. The strengthening USD, combined with investors refraining from risks, contributed to NZD decline by 0.7%. As a result, the kiwi fell by more than 1% against the greenback.

According to analysts, the outlook for the NZD/USD pair does not spark optimism. Earlier the kiwi was growing steadily, but its rally has stopped. The burning interest in buying NZD was triggered by the August reports of the RBNZ, which were supported by the regulator's hawkish sentiment. The New Zealand dollar is expected to continue growing only if the national economy shows a significant improvement in its prospects. The NZD/USD was trading at 0.6933 on Friday, October 7. Experts do not exclude the pair to move towards the resistance located at 0.6890, which may lead the pair to 0.6500. This scenario is possible in the case of lower risk sentiment on the global markets.

According to the RBNZ, the easing of stimulus measures and the monetary policy (MP) depends on the medium-term prospects for inflation and employment levels. The decline in consumers' demand caused by the COVID-19 pandemic has had a major impact on New Zealand's economic growth. At the same time, the New Zealand economy has faced a noticeable capacity constraint, which has slowed its growth.

In the short-term planning horizon, the consumer price index (CPI) may exceed 4%, but in the medium-term, it is expected to return to the target of 2%, the RBNZ underlined. The regulator stated that the threat of a new inflation wave is one of the hot topics influencing the central bank's future strategy. The central bank believes that the next steps depend on medium-term indicators of consumer inflation and the national labor market. Notably, the prolonged lockdown in Auckland is overshadowing the extensive gains in the employment sector. The country's inflation rate is currently well above the target level, which does not hinder optimism about the future.

The New Zealand economy has shown quite strong indicators, thus explaining the recent rate hike. At the same time, policymakers remain cautious despite their optimism. The New Zealand authorities state that they have to learn to live in the new reality, incorporating measures to cope with the negative effects of the pandemic.