NZD/USD drops to three-week low, further below 0.5900 mark after RBNZ’s inaction

• NZD/USD turns lower after the RBNZ decided to leave its cash rate target unchanged.
• The dovish-sounding monetary policy statement exerts some pressure on the Kiwi.
• The USD stands tall near a multi-month high and contributes to the intraday decline.

The NZD/USD pair meets with a fresh supply after the Reserve Bank of New Zealand (RBNZ) announced its monetary policy decision and turns lower for the third successive day on Wednesday. Spot prices slid to a fresh three-week low, further below the 0.5900 mark in the last hour and seem vulnerable to weaken further.

As was widely anticipated, the RBNZ decided to keep its cash rate target unchanged at 5.50% and sounded a bit dovish in the accompanying monetary policy statement. The central bank noted that demand growth in the economy continues to ease and higher interest rates are reducing inflationary pressure as required. This, in turn, suggests that the RBNZ might have ended the rate-hiking cycle and undermined the New Zealand Dollar (NZD), which, along with a bullish US Dollar (USD), exerts pressure on the NZD/USD pair.

In fact, the USD Index (DXY), which tracks the Greenback against a basket of currencies, holds steady near a 10-month high and remains well supported by the Federal Reserve’s (Fed) hawkish view. Investors seem convinced that the US central bank is more likely to tighten its monetary policy further and keep interest rates higher for longer. The bets were reaffirmed by the recent comments by several Fed officials, backing the case for at least one more rate hike by the end of this year to bring inflation back to the 2% target.

Adding to this, the latest monthly JOLTS report showed that there were an estimated 9.61 million open jobs in August, marking a sizeable uptick from the previous month’s upwardly revised reading of 8.92 million openings. The data suggested that wage inflation may be back on the agenda, which might force the Fed to extend the rate-hiking cycle into 2024, pushing the yield on the benchmark 10-year US government bond to a fresh 16-peak. This, along with, a weaker risk tone further benefits the Greenback’s safe-haven status.

The prolonged selloff in the US fixed-income market and surging US bond yields add to concerns about economic headwinds stemming from rapidly rising borrowing costs. Apart from this, persistent worries about China’s ailing property sector continue to weigh on investors’ sentiment and weigh on the risk-sensitive Kiwi. With the latest leg down, the NZD/USD pair now seems to have found acceptance below the 0.5900 mark and is likely to prolong its recent downfall from mid-0.6000s, or a near two-month high set last week.

Technical levels to watch