The Reserve Bank of New Zealand has become a "pioneer" among the central banks of the world's leading countries in the context of tightening monetary policy parameters after the coronavirus crisis. The regulator increased the interest rate by 25 basis points, that is, up to 0.5%. However, the market reacted in its own way – the NZD/USD pair sharply declined by almost 100 points to the base of the 0.69 level during the Asian session on Wednesday. Such a price movement is due to two key factors: first, the New Zealand dollar has become a victim of inflated expectations of traders, and second, it has fallen under the roller of dollar bulls, which are currently strengthening their positions throughout the market. These circumstances did not allow NZD/USD buyers to take advantage of the results of the RBNZ's October meeting.
It can be recalled that the New Zealand regulator was supposed to raise the rate back in August. But just a day before the meeting, the first case of coronavirus in many months was discovered in the country (until that moment, only isolated cases of COVID-19 were registered at the quarantine stage after crossing the border). As a result, the members of the Central Bank did not risk tightening monetary policy at the August meeting, but at the same time, they made it clear that the rate will be at the level of 0.75% by the end of this year. Given the fact that the RBNZ does not hold its meetings on a monthly basis, market participants assumed that the rate would be increased at the October meeting by 0.5% or by 0.25%, with the announcement of a further increase at the November meeting, which will be the last one this year.
In other words, the expectations of the market were overstated, and this fact did a disservice to traders of the NZD/USD pair. In general, the RBNZ did not implement any of the "hawkish" scenarios – the regulator increased the rate by only 25 basis points and vaguely outlined the prospects for further tightening of monetary policy parameters. At the same time, the market recovered the 25-point increase at the end of the summer, when the NZD updated its multi-month high by testing the level of 0.71.
Therefore, today's reaction to the seemingly "hawkish" decision should not be surprising. Traders expected more, but they got what they got. The RBNZ did not force events, allowing a rate increase in the near future, but without clear time benchmarks. In its accompanying statement, the Central Bank only indicated that a further reduction in economic stimulus through monetary policy is expected soon. At the same time, the Central Bank noted that the outbreak of coronavirus and subsequent quarantine restrictions "did not have much effect on the medium-term forecast for inflation and employment," while the growth of inflation indicators "is becoming more stable."
Against this background, traders of the NZD/USD pair were not impressed by the results of the October meeting of the RBNZ, so they could not restrain the attack of dollar bulls, which strengthened their positions all over the market during today's Asian session. The dollar index tested the 94th figure again, following the yield of 10-year treasuries, which updated the 4-month high today. The ongoing "oil rally", strengthening inflation expectations, and the rising probability of a Fed interest rate hike next year is pushing the US dollar upwards.
It is worth noting that the price of a barrel of Brent has exceeded the $ 83 mark for the first time in the last three years amid a stable upward trend. And according to experts' general opinion, the oil prices will only grow in the near future, reaching a $90 value by the end of the year. In addition, WTI crude oil is updating long-term records, rising to the highest level since 2014 (the cost of November futures rose to $ 79 per barrel). The oil rally is supported by the recent decision of the OPEC+ countries to maintain the previous levels of production growth (400 thousand barrels per day during November with an expected increase in the limit to 800 thousand b/d).
It is worth noting that the US dollar may further strengthen its position today if the ADP report, which is considered a signal of Friday's Nonfarm, comes out in the "green zone".
The NZD/USD pair increased during the three trading days that preceded the RBNZ's October meeting despite the general strengthening of the US dollar. And when the most hawkish scenarios did not appear, the New Zealand dollar declined. This currency became a victim not only of traders' inflated expectations but also of the trading principle "buy on rumors, sell on facts".
Given the fact that the NZD/USD pair has impulsively broken through the support level of 0.6930 (the lower border of the Kumo cloud on the daily chart), it can be assumed that the NZD will collapse in the medium term until the next price level of 0.6860, which corresponds to the lower line Bollinger Bands indicator on the same timeframe.
