New Zealand Dollar Drops as RBNZ Holds Back Rate Hike on Covid Flare-Up

• RBNZ keeps Official Cash Rates at 0.25% with country in snap Covid lockdown

• The New Zealand Dollar sold off after the decision through the prior low 0.6880

• Potential for NZD/USD to weaken further as rate hike expectations wind back

The RBNZ delivered a surprise with the official cash rate remaining at 0.25% and the market immediately reacted, with the New Zealand Dollar making a new low below 0.6880. Clearly, RBNZ policymakers were concerned about further Covid cases hampering the economy as six new community transmission instances were reported just prior to their decision.

Prior to the RBNZ announcement, interest rate markets had taken a 50bp hike off the table and most New Zealand commercial banks were expecting a 25bp increase.

The decision to remain on hold was made against the backdrop of yesterday‘s strong PPI, July’s CPI surging above the RBNZ‘s own forecasts and June’s strong GDP number. Additionally, a hot housing market and unemployment down to 4% from 4.7% wasnt enough for the RBNZ to look past Covid potentially spreading further and keeping the economy in lockdown for longer.

Looking ahead, the market will now be shifting focus toward Covid case numbers in New Zealand and throughout the region. Daily case numbers is more likely to provide markets with direction as this will play a much larger role in economic activity and rate decisions going forward.

NZD/USD INITIAL REACTION TO RBNZ DECISION

New Zealand retail sales and trade data will be released next week but the market is likely to look through this data as the impact of the current national lockdown will not be reflected in the numbers. For markets, this will likely place more emphasis on the Covid case numbers and the extent of the lockdown for future direction of rates and the NZD/USD. FOMC meeting minutes will be released in the next US session and may impact the USD side of the cross, depending on the language around tapering QE asset purchases.

NZD/USD TECHNICAL ANALYSIS – RANGE TRADE OR BREAKOUT FOR NZD？

A new low in NZD/USD for 2021 was not enough to break the trend line support from previous lows so far this year. Given the pull back after the initial sell off, it will most likely take fresh impetus to see NZD/USD move significantly lower.

NZD/USD DAILY CHART