Kiwi anchors inflation. Forecast as of 26.05.2022

While some FOMC officials suggest a pause after an aggressive rate hike, the RBNZ is not going to stop. Where will the NZDUSD go? Let us discuss the Forex outlook and make up a trading plan.

Monthly New Zealand dollar fundamental forecast

New Zealand’s central bank has raised interest rates for the fifth time in a row. It means the regulator is willing to continue aggressive monetary tightening to come to tame inflation. Although 19 of 22 economists in a Bloomberg survey expected the RBNZ to raise the rates by half a point, the aggressive hawkish speeches of the officials encouraged the NZDUSD bulls to send the price to three-week highs.

The inflation rate in New Zealand has hit 6.9%, the highest in more than thirty years, and the unemployment rate of 3.2% is a record low. So, aggressive monetary tightening looks reasonable. Before the May meeting, the Reserve Bank of New Zealand predicted the cash rate to be rising gradually and reach 3% by the end of 2023. A peak of 3.35% was expected in 2024. Now, the RBNZ expects the rate to rise from the current 2% to 4% and remain at this level in 2024. The Central Bank intends to bring it to a neutral level as soon as possible, which, according to its estimates, is in the range of 2-3%.

Dynamics of RBNZ rate


Source: Bloomberg.

Reserve Bank governor Adrian Orr said the bank needs to raise interest rates “at pace” to prevent inflation expectations from becoming unanchored. The RBNZ wants to move at pace to a level of around 4%, which means several rate hikes by 50 basis points and 25 basis points. New Zealand two-year ahead inflation expectations have risen to 3.29%, while five-year expectations have climbed to 2.42%.

Thus, the monetary policy of the RBNZ is more than transparent, it is not going to stop, which, against the backdrop of a potential Fed pause in September, encourages the NZDUSD bulls. However, there are some potential headwinds. First of all, it is a downturn in China’s economy and a potential slide of the S&P 500 into a bear market.

Lower forecasts for China’s growth by Goldman Sachs, Citigroup, UBS, and JP Morgan amid the COVID-19 outbreak is a bearish factor for the New Zealand dollar. However, most negative factors associated with China, the main trade partner of New Zealand, have been priced in the Kiwi quotes. Furthermore, the UBS expects the Chinese GDP to recover in Q3-Q4, though not as fast as in 2020 when China’s exclusivity was the major driver for the NZDUSD. I suppose something like that will be in the second half of 2022.

The US stock indexes have more gloomy prospects. History shows that sell-offs during bear markets typically involve four phases. S&P 500 becomes oversold, is corrected up, tests the previously formed lows, and recovers. Phase 3 was skipped in 2020 because of ample cheap liquidity from the Fed. However, in 2022 all four steps should be followed.

Monthly NZDUSD trading plan

Therefore, the NZDUSD correction could develop into an uptrend, but the bulls are to face some obstacles. I suggest the pair should be at 0,66 and 0,68 in one and three months. So, one could enter buy trades on the corrections.

Price chart of NZDUSD in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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