NZD/USD Targets 0.74 As Divergence Between Fed And RBNZ Emerge

The NZD/USD pair jumped by more than 1% in early trading after the relatively hawkish interest rate decision by the Reserve Bank of New Zealand (RBNZ). It rose to 0.7310, which was 2.75% above the lowest level this month.

RBNZ hawkish statement

New Zealand’s response to the coronavirus pandemic was better than in most countries. The government’s measures led to just 25 deaths. This performance also helped the country’s economy to be a bit more stable than in other comparable places.

It is against this backdrop that the RBNZ held its interest rate decision. In a statement published on Wednesday, the bank left interest rates unchanged at 0.10%. It also pledged to continue with its large-scale asset purchase program (LSAP) and other bond purchasing measures to facilitate this recovery. 

At the same time, the bank provided hints that it will start to tighten in the coming year. It said that it would hike interest rates when unemployment falls and inflation rise to 2%. Based on the recent numbers, this implies that the bank will start hiking in 2022. It also said that it would continue with its asset purchases program, meaning that it will not increase the amount. In fact, the members affirmed that the $100 billion figure was just a limit and not a target.

In its monetary statement, the RBNZ said that it expects that the official cash rate will rise to 0.67% by December next year and by 1.5% in the following year. 

The bank expects that the economy will continue doing well as the country ramps up its vaccination effort, leading to the eventual reopening. This, in turn, will help bring back to life some of the industries that have lagged, especially in the restaurant and hospitality sector. 

Divergence with the Fed

The NZD/USD rose because of the diverging views between the RBNZ and the Federal Reserve. While the RBNZ sounded hawkish, the Fed, on the other hand, has insisted that it will not change its monetary policy any time soon.

This is despite the fact that the American economy has staged a stronger recovery than most countries, helped by the large stimulus package by the federal government. This year alone, the government has offered a stimulus package worth more than $2.8 trillion.

All this has led to a stronger economy, as evidenced by the recent numbers. For example, retail sales have jumped while the labor market has tightened. Home prices have also bounced back to the highest level since 2005. Similarly, the labor market has tightened, and many companies are struggling to find workers. 

Despite all this, Fed officials have hinted that the current monetary policy will continue. This means that they will keep interest rates low and continue expanding their balance sheet.

NZD/USD technical analysis

The four-hour chart shows that the NZD/USD pair rose sharply after the RBNZ interest rate decision. It managed to move above the previous resistance level at 0.7305. The pair has also risen above the 25-day and 15-day Moving Averages and is now approaching the 23.6% Fibonacci retracement level. The price is also above the dots of the Parabolic SAR indicator.

Therefore, the pair will likely keep rising as bulls target the psychological level at 0.7400. However, a drop below the 38.2% retracement at 0.7265 will invalidate the prediction.