The New Zealand dollar, also known as the Kiwi, has taken a significant hit as it experienced a sharp decline against the US dollar, reaching a 4-week low. This downward trend can be attributed to a dovish shift in the latest monetary policy statement released by the Reserve Bank of New Zealand (RBNZ), leading to a narrowing of the yield discount between Australian and New Zealand government bonds.
The RBNZ chose to keep its key short-term official cash rate unchanged at 5.50%, marking the eighth consecutive meeting without a change. However, the surprise came from the bank’s monetary policy statement, which now carries a more dovish tone. The RBNZ mentioned that the high interest rate environment in New Zealand has had a stronger impact on domestic demand than anticipated, with various economic indicators pointing to a decline in activity. This stark shift from a slightly hawkish stance in the previous statement has caught many market participants off guard.
The sudden change in RBNZ’s outlook has led to a significant intraday sell-off of the Kiwi against the US dollar, making it the weakest performer among major currencies. Short-term interest rate swaps now predict two rate cuts by the RBNZ before the end of 2024, causing the yield of the 2-year New Zealand government bond to drop by 15 basis points. This drop has also contributed to a further narrowing of the yield gap between Australian and New Zealand government bonds, potentially favoring the Australian dollar over the Kiwi in the near future.
Looking at the technical aspect, the AUD/NZD cross pair has broken above its medium-term resistance level, signaling a potential bullish momentum. The MACD trend indicator has been steadily rising above the zero centerline, supporting the view of a medium-term uptrend. If the key support level at 1.1000 holds, the AUD/NZD could continue to rally towards long-term resistance levels at 1.1165/1190 and 1.1430/1460. On the other hand, a failure to maintain support at 1.1000 could signal a bearish reversal, leading to a corrective downward movement with support levels at 1.0890 and 1.0735.
The recent dovish turn by the RBNZ has had a significant impact on the New Zealand dollar, causing it to underperform against the US dollar and triggering a potential shift in market dynamics favoring the Australian dollar. Traders and investors need to closely monitor these developments and adjust their strategies accordingly to navigate the changing landscape of currency markets.
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