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NZ Dollar surges on hawkish central bank

25 May 2022

The New Zealand Dollar regained early losses and recorded a large gain on Wednesday following a hawkish stance from the Reserve Bank of New Zealand.

As widely forecast, the country’s central bank hiked its key interest rate by half a point but released more hawkish guidance in regard to future policy, stating that an earlier, larger rate increase lowers the risk of inflation becoming constant.

The New Zealand Dollar reversed losses of 0.53% before the central bank’s rate decision, to gain 0.83%, reaching a three-week high of $0.6514. The Kiwi was last trading 0.63% higher at $0.6501, Reuters reports.

"The Reserve Bank's new track exceeded market pricing and that's very unusual, that they would overshoot," stated Imre Speizer, a Westpac strategist, who forecasts the New Zealand Dollar to extend gains to $0.66 over the next 24 hours. "This was a significant hawkish surprise, not one to be brushed off lightly."

Elsewhere, the U.S. Dollar index edged up 0.2% to 101.95, moving away from an overnight low of 101.64. The index fell 1.23% on Monday and Tuesday, further away from the close to 20-year high over 105 in mid-May. This came amid a fall in benchmark Treasury yields as traders prepared for a less aggressive path of Fed rate hikes.

The 10-year Treasury yield moved up to 2.7685% in Tokyo trading, after falling close to a one-month low of 2.718% overnight. The Dollar was up 0.12% against the Yen to trade at 126.985 Yen.

Moreover, the Euro fell 0.25% to $1.0707, but stayed close to Tuesday’s high of $1.0748. This level hasn’t been seen since 25th April, following comments from European Central Bank President Christine Lagarde that eurozone interest rates will likely be in positive territory by the end of Q3.