Market Over-Reacts? NZD tanks more than 2% The New Zealand dollar experienced a significant drop of over 2% on Wednesday, reaching its lowest level in more than three months at $0.6039. This decline followed the Reserve Bank of New Zealand's (RBNZ) expected decision to raise cash rates by 25 basis points to 5.5%. However, the central bank also hinted that it might conclude its tightening campaign, which likely contributed to the currency's decline. In more positive news, inflation expectations eased during the first quarter, dropping from 3.30% to 2.79%, potentially solidifying the RBNZ's choice to halt further rate hikes.
Analyzing the 1-hour chart of the NZD/USD pair, it is evident that it broke below the previous swing low at 0.6111. However, the selling momentum may have started to weaken in the past hour, as indicated by the extreme oversold condition of the Relative Strength Index (RSI) and the pair's inability to close below 0.6100. The next target for a downward movement could be 0.6092, which seems to be the level where current sellers feel comfortable probing further.
One potential explanation for this slowdown could be the release of the latest Federal Open Market Committee (FOMC) minutes. The minutes revealed a division among Federal Reserve officials during their previous meeting regarding the future direction of interest rates. Some members believed that further rate increases were necessary, while others anticipated a slowdown in economic growth that would negate the need for additional tightening measures. As a result, the committee decided to remove the phrase "additional policy firming may be appropriate" from its post-meeting statement.
Market expectations currently indicate that the rate increase in May will be the final one in the current cycle. Furthermore, there is speculation that the Federal Reserve may reduce rates by approximately a quarter percentage point before the year's end. If this prediction holds true, it could be argued that the sharp decline in the New Zealand dollar is an overreaction.
