04.10.202214:50 Forex Analysis & Reviews: NZD/USD: Ahead of the RBNZ meeting

By raising the interest rate by 0.25% today, the Reserve Bank of Australia has disappointed buyers of the Australian dollar. The RBA cited weakening growth prospects for the global economy as the main reason for this decision.

The decision to raise the rate by 0.25% came as a surprise to market participants who had expected a 0.50% increase. While the RBA's accompanying statement said that "the central bank remains strongly committed to bringing inflation back to its target" and "expects further interest rate hikes in the coming period," market participants viewed the decision as a mild one to further strengthen the Australian dollar. It fell sharply immediately after the publication of the RBA decision.

Tomorrow, the Reserve Bank of New Zealand will make its decision on interest rates. Looks like there won't be any surprises here. In a recent Reuters poll, economists predicted that the RBNZ would raise its key rate by 50 basis points to 3.50% at its meeting on October 5, and most of them expect the RBNZ interest rate to reach at least 4.00% by the end of this year.

This is a bullish factor for the national currency. At the same time, we are witnessing an extraordinary situation in the financial markets. The central banks of the leading economically developed countries have embarked on the path of raising their interest rates. However, inflation in their national economies continues to rise, while the tightening of monetary conditions in itself has a negative impact on economic growth.

The RBNZ, like other major world central banks, is in the same difficult situation—high and rising inflation, on the one hand, and a slowdown in the economy, on the other.

Inflation in New Zealand will remain well above the RBNZ target range of 1%–3% through at least the end of 2023, economists say. The average inflation rate is expected to be 6.5% this year before falling to 3.5% in 2023. In July, this forecast assumed 6.0% and 2.8%, respectively.

Thus, it may be difficult to predict the market's reaction to tomorrow's RBNZ decision in this situation. An interest rate hike expected tomorrow may not be a significant growth driver for NZD, given the growing recession risks for the New Zealand economy, although, in itself, an interest rate hike is, as we noted above, a bullish factor for the national currency.

Recall that the decision of the RBNZ on the interest rate will be published tomorrow (at 01:00 GMT), and from the news for today regarding the dynamics of the NZD and the NZD/USD pair, it is worth paying attention to the publication (after 14:00 GMT) of the price index for dairy products from Global Dairy Trade. The economy of New Zealand still has many signs of raw materials, with the bulk of New Zealand's exports coming from dairy products and food products of animal origin (27%, as of 2020). Therefore, a decrease in world prices for dairy products (by -0.1% is expected) may have a negative impact on NZD quotes.

As for the NZD/USD pair, it is trading in a range today, and is near the opening price of today's trading day and 0.5720.

It is perhaps worth noting that NZD/USD has been trading for the 7th day in a row in a range. For further movement in one direction or another, the price clearly lacks additional drivers. Perhaps tomorrow's decision of the RBNZ will become such. However, it is not at all a fact that NZD/USD will move upward. It is possible that after testing for a breakdown of the local resistance level and today's high of 0.5757, NZD/USD will continue to develop a downward trend, especially if the decline in the stock markets resumes or US dollar buyers receive new confirmation of the correctness of their decisions (tomorrow at 12:15 and 14:00: 00 important macro statistics are expected from the US, and on Friday the US Department of Labor will present its monthly report).