FX.co ★ NZD/USD: RBNZ unexpectedly increased the rate by 50 points at once

The NZD/USD currency pair updated an almost two-month price high, rising to 0.6375. The reason for another upward surge was the decision of the Reserve Bank of New Zealand, which increased the interest rate by 50 points at once today at the end of its regular meeting, contrary to most analysts' forecasts of a 25-point rate hike. This unexpected move surprised investors, triggering increased volatility in the NZD/USD pair.

Weak GDP report and natural disasters

Overall, dovish rumors and forecasts dominated the market ahead of today's RBNZ meeting. The pessimism was driven by the weak New Zealand economic growth report, released in mid-March. The volume of GDP in the fourth quarter of last year increased by 2.2% YoY, while the growth forecast was 3.3% (in the third quarter, there was a 6.4% growth). On a quarterly basis, the economy shrank by 0.6%, while most experts predicted a more modest decline of 0.2%. At the same time, the island nation's economy grew by 1.7% in the third quarter. It is noteworthy that the result of the fourth quarter was much weaker than expectations of the Reserve Bank of New Zealand, which in February had forecast the growth of the economy of the country by 0.7%. Such discrepancy unpleasantly surprised traders of NZD/USD: in March, the kiwi came under pressure, falling to the base of the 61st figure.

Severe weather conditions, which clouded the economic outlook, also added fuel to the fire. Unrelenting rains earlier this year caused landslides, flooding, destroyed homes, closed highways and damaged infrastructure. According to authorities, climate change has caused heavy rainfall in New Zealand to become more frequent and intense. Tropical Storm Gabriel, which hit New Zealand in late January, was so strong that the country declared a state of emergency—only the third time in the nation's history.

The economic consequences of the weather disaster have yet to fully manifest themselves. For example, UOB Group economists in March lowered their 2023 GDP growth forecast to 1.3% (from a previous estimate of 1.5%) and suggested that the RBNZ might refuse to raise rates further in light of concerns about financial stability, surging domestic migration and recession risks.

RBNZ surprises with hawkish mood

Still, the general consensus forecast suggested another round of OCR rate hikes in April, albeit by only 25 points. Despite the fact that the RBNZ had previously kept a "sports pace," raising the rate by a 50-point step, and then decided on a 75-point increase in November 2022. The failed report on GDP growth in Q4, and natural disasters, weakened hawkish expectations regarding the further actions of the New Zealand regulator.

But against all odds, the RBNZ surprised investors with its hawkishness by raising interest rates again by 50 basis points.

The main reason for this is inflation. According to the latest published data, inflation in New Zealand was 7.2% in Q4 2022, a near 32-year high and well above the central bank's target range of 1% to 3%.

Commenting on the results of the April meeting, the RBNZ indicated that committee members had discussed a 25 or 50 basis point rate hike. In the end, the scales tipped in favor of the 50-point scenario, given that inflation "is still too high and persistent. At the same time, according to the central bank members, natural disasters can only worsen the situation in this regard, as recovery processes after extreme weather events will boost activity and inflation.

Assessing the future prospects, the regulator actually refuted the assumptions that the current cycle of tightening monetary policy is close to its end. The minutes of the meeting indicate that the central bank "should continue to raise the rate to return inflation to the 1%–3% target level of and fulfill its powers."

Conclusions

The hawkish messages of the RBNZ supported the New Zealand dollar, including in a pair with the greenback. Contrary to the "dovish" forecasts, the Reserve Bank of New Zealand maintained a hawkish (and aggressive) attitude, announcing further tightening of monetary policy parameters. The prevailing fundamental background contributes to the development of the upward trend of NZD/USD in the medium term.

Technical picture also shows the priority of long positions on the pair. On the D1 timeframe, the pair is on the upper line of the Bollinger Bands indicator and above all lines of the Ichimoku indicator, which formed a bullish "Parade of lines" signal. Resistance level (upward movement target) is the upper boundary of Kumo cloud on the weekly chart, which corresponds to 0.6390.