The NZD/USD price jumped by more than 1% on Wednesday morning after the latest interest rate decision by the Reserve Bank of New Zealand (RBNZ). It rose from this week’s low of 0.6917 to 0.7023. The kiwi also gained sharply against the euro, sterling, and Australian dollar.
RBNZ interest rate decision
Like all central banks, the RBNZ announced major policy changes in its response to the coronavirus pandemic. It lowered its interest rates to a record low of 0.25% and announced an extensive quantitative easing (QE) program. The bank also launched a Funding for Lending Programme (FLP) to provide financing for businesses.
Now, as the New Zealand economy bounces back from the pandemic, the bank has decided to gradually transition its monetary policy. In a statement on Wednesday, the bank decided to leave interest rates unchanged at 0.25% and the Funding for Lending Programme intact.
In a major change, it said that it will end the Large-Asset Purchase Program (LSAP) program on July 23rd. The statement said that these asset purchases were no longer necessary now as the economy is in top gear. As a result, it became the first major central bank to signal an end to QE.
Other central banks have taken a more cautious route. The Reserve Bank of Australia (RBA) decided to lower its monthly asset purchases by $1 billion to $4 billion. Similarly, the Bank of Canada (BOC) decided to reduce the number of purchases by C$1 billion. Recently, the minutes of the FOMC showed that some members have started talking about tapering the asset purchase program.
In its statement, the RBNZ said that it expects inflation to rise modestly in the next few months because of higher demand as the economy recovers. It also expects that the economy will rebound, helped by the service and travel-related sectors that suffered the most in 2021. A hawkish RBNZ tends to be a good thing for the NZD/USD.
US inflation spike
The NZD/USD rally helped erase some of the losses on Tuesday after the US released robust inflation data. The numbers showed that the headline CPI rose by 0.9% on a month-on-month (MoM) basis. This, in turn, led to an annualized gain of 5.4%, which was the highest level since 2008. Core CPI, which excludes the volatile food and energy prices, rose by 4.2% in June.
Therefore, investors are concerned about this inflation’s temporary or transitory nature, considering that prices have remained above the Fed’s target of 2.0% in the past three consecutive months. As such, there is a rising possibility that the Fed will soon turn hawkish.
Indeed, the FOMC minutes published last week revealed that some committee members started talking about tapering of asset purchases. This talk will likely intensify in this month’s meeting.
The NZD/USD will next react to testimony by Jerome Powell that will take place on Wednesday. The Fed will also publish its Beige Book.
NZD/USD technical analysis
The three-hour chart shows that the NZD/USD price rebounded after the latest RBNZ decision. Subsequently, it moved above the 25-day and 50-day Moving Average, while the Relative Strength Index (RSI) continued rising.
The pair also moved above the standard pivot point. Therefore, there is a possibility that the pair will rise to the first resistance of the pivot point at 0.7100. The downtrend is likely to resume since Powell is expected to turn hawkish.