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Snap Lockdown Puts RBNZ Hike into Question, NZD/USD Drops to Three-Week Low

Snap Lockdown Puts RBNZ Hike into Question, NZD/USD Drops to Three-Week Low

Daniela Sabin Hathorn, Analyst

Key Talking Points:

  • New Zealand enters a snap 3-day lockdown after one confirmed case of Covid-19 in Auckland
  • RBNZ probability of 25 bps hike drops to 85% from 100%
  • NZD/USD resting on key support area

The New Zealand Dollar has spiked lower this morning after a snap 3-day lockdown has been announced. This comes after the first case of Covid-19 was detected in the country since February, with Auckland having an extended 7-day lockdown as it is the origin of the only case confirmed in the last six months.

The decision was made by Prime Minister Jacinda Arden who argues that “it is better to start high and go down levels than to start too low, not contain the virus and see it move quickly”. Both New Zealand and Australia have been praised in the past for their swift action to control the virus, but this nationwide lockdown on the basis of one confirmed case may seem a bit extreme.

But that is not the main worry for markets as a three-day lockdown is likely to have little to no impact on the local economy, the issue is the increasing calls from economists that are now predicting that the Reserve Bank of New Zealand (RBNZ) will not change the Overnight Cash Rate (OCR) at tomorrow’s meeting, which is a U-turn on expectations that it would be the first central bank to hike rates. In fact, money markets were pricing in a 100% chance of a 25 bps hike at Wednesday’s meeting, and a 20% chance that the bank would hike 50 bps. This has now been updated to an 85% chance of a 25 bps hike, with a 15% chance of no change at all.

NZD/USD is moving lower on the back of this change in expectations but I would expect the RBNZ to go ahead with its planned monetary schedule, which would likely include a 25bps rate hike in tomorrow’s meeting as this decision would have been made a few days in advanced and I find it hard to believe that they would change their mind from one day to another on the basis of a preventive measure.

But this situation has made it more difficult to try and predict the reaction in the New Zealand Dollar on the back of tomorrow’s meeting, as what seemed like a done deal just hours ago is now up in the air. I would expect an unchanged OCR would be a blow to the kiwi, possibly sending NZD/USD below its current support range (0.6938 – 0.6883).

Alternatively, if a rate hike is in fact confirmed, then I would expect to see the pair back above 0.70, where it was before the lockdown was announced, and possibly attempting to break above resistance at 0.7093.

NZD/USD Daily chart

Snap Lockdown Puts RBNZ Hike into Question, NZD/USD Drops to Three-Week Low

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--- Written by Daniela Sabin Hathorn, Market Analyst

Follow Daniela on Twitter @HathornSabin

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.