Why did the kiwi drop after the RBNZ decision?

The NZD/USD pair crashed to the lowest level since March 16th even after the significantly hawkish interest rate decision by the Reserve Bank of New Zealand (RBNZ). The pair dropped to a low of 0.6800, which is about 3.37% below the highest level this month.

RBNZ interest rate decision

The RBNZ concluded its two-day meeting on Wednesday and caught many investors by surprise. The bank decided to hike interest rates from 1% to 1.50%. This increase was bigger than the median estimate of 1.25%. It was also its biggest interest rate hike in 22 years.

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The bank attributed this rate hike to the fact that the New Zealand economy has had a strong recovery than expected. The unemployment rate has dropped to the lowest level before the pandemic started. Other sectors like agriculture and manufacturing have also surged.

The biggest catalyst for RBNZ decision was the rising inflation in the country. Recent data showed that the rising price of oil and gas has triggered the fastest inflation in years. The officials noted that inflation could rise to 7% in the first part of the year, thanks to the ongoing crisis in Ukraine. The statement added:

“The Committee agreed that their policy ‘path of least regret’ is to increase the OCR by more now, rather than later, to head off rising inflation expectations and minimise any unnecessary volatility in output.”

So, why did the NZD/USD pair decline after the hawkish rate hike? First, the decline is likely because investors had priced in the hawkish RBNZ. This explains why the NZDUSD pair has been in a strong uptrend in the past few months. Second, now that the RBNZ has moved, investors are focusing on the Federal Reserve. Finally, some analysts expect that the RBNZ will slam brakes on more rate hikes.

NZD/USD forecast

The four-hour chart shows that the NZD/USD pair has been in a strong bullish trend since February. This comeback has now pulled back and declined below the ascending trendline. It has also moved below the 25-day and 50-day moving averages while the MACD has moved below the neutral level. It is also approaching the 50% Fibonacci retracement level.

Therefore, the pair will likely keep falling as bears target the 61.8% Fibonacci retracement level at 0.6725. A move above the resistance at 0.6845 will invalidate this view.

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