Trade of the Week: Kiwi to reach 200-day SMA on record RBNZ hike?

The New Zealand dollar has been flying high in this tail-end of 2022.

And it could be further boosted by a hawkish Reserve Bank of New Zealand (RBNZ) this week.

 

NZD in Q4: by the numbers

NZD has a quarter-to-date gain against all of its G10 and Asian peers.

Here’s a sample:

• NZD up 3.1% against GBP
   
• NZD up 4.4% against EUR
   
• NZD up 5.3% against AUD
   
• NZD up 6.5% against JPY
   
• NZD up 8.5% against USD

(% performance since September 30th till time of writing)

 

Even going slightly further back, for the second half of this year so far, the kiwi only has declines against FX safe havens such as the US dollar, Swiss Franc, Singapore dollar, and the Hong Kong dollar (HKD is pegged to USD).

 

What’s driving NZD’s outperformance of late?

Markets are forecasting a 64% chance that the RBNZ will trigger a 75-basis point hike this week.

If so, that which would be the RBNZ’s largest ever hike since its official cash rate was rolled out in 1999!

And a record hike would only add to cumulative hikes by this central bank, having already raised its official cash rate by 325 basis points (bps) since October 2021, including 50-basis points at each of its past five meetings.

Generally speaking, the higher interest rates go in an economy relative to its peers, the stronger its currency.

READ MORE: Why FX markets react to central banks? (September 22, 2022)

 

Why would the RBNZ need to trigger a record hike?

A larger 75bps hike may be needed to keep consumer prices from rising uncontrollably.

Note that a central bank’s main weapon against runaway consumer prices is by raising interest rates to “destroy” demand in the economy.

Keep in mind:

• New Zealand’s consumer price index (CPI) for the third quarter rose by 7.2% compared to 3Q 2021.
   
• That 7.2% figure was above the median forecast of 6.5%, with the former number being near its highest levels since 1990!

And that’s even with all of the RBNZ’s hikes that have been incurred over the past year which apparently are having little impact on the inflation scourge so far.

READ MORE: Inflation everywhere! What does it mean for markets? (February 2022)

 

Hence, NZD has been lifted on the wings of expectations that the RBNZ may well send its benchmark rates higher than previously anticipated.

Markets are now forecasting that New Zealand’s interest rates will keep rising from the 3.5% level at present before peaking around 5.15% by mid-2023.

And this has been an opportune time for NZD bulls to take advantage of the US dollar’s pullback, with markets expecting that the Fed is getting closer to being down with its own US rate hikes.

But if the RBNZ actually opts for a 50-bps hike this week instead, that may disappoint NZD bulls who had been hoping for that larger 75bps hike, potentially prompting them to unwind some of NZD’s recent gains.

 

Can NZDUSD reach 200-day SMA?

At present, markets are forecasting only a 16% chance of NZDUSD the 0.63 mark, around where the kiwi’s (nickname for NZDUSD) 200-day simple moving average currently lies.

After all, Kiwi bulls (those hoping NZDUSD can climb higher) are already encountering resistance around the 0.62 psychological area, which has been a key battle region between bulls and bears since May.

Looking at a key technical indicator, NZDUSD’s 14-day relative strength index (RSI) is also pulling back from the 70 threshold which typically denotes overbought conditions, suggesting that the NZD’s ascent has gone too far.

To the downside lies its 100-day SMA, just above the 0.60 mark, which may offer underlying support should the RBNZ disappoint this week or if the US dollar’s catches fresh safe haven bids.

Markets are currently forecasting a 41% chance of 0.60 being attained by Kiwi bears for the next one-week period.

 

To recap, NZDUSD’s performance this week may all come down to the following key events:

• the size of the RBNZ’s actual cash rate hike
   
• RBNZ’s outlook for the cash rate going into 2023
   
• Fed meeting minutes released on Wednesday/scheduled speeches by Fed officials this week

And on that final point above, let's take a brief look at the USD half of NZDUSD.

Noting that this week is absent of tier-1 US economic data, the US dollar could react to fresh policy clues out of the FOMC meeting minutes and the Fed speakers due before the Thanksgiving break.

Should the US dollar relinquish its gains at the onset of this week, on renewed hopes that the Fed is closer to being down with its own rate hikes, that could make NZDUSD’s path towards its 200-day SMA a lot easier.

 

NZDUSD Kiwi RBNZ Reserve Bank of New Zealand inflation rate hikes FOMC