Why the Kiwi Rolled Over After Rate Hike

The RBNZ hiked rates but the New Zealand dollar plunged early in Asia-Pacific trading. On Wednesday, the Australian dollar led the way while the pound lagged in the sixth day of declines. Japanese trade balance is due later. 

A hike from the RBNZ wasn't a sure thing – the OIS market was only pricing an 86% chance and 1 of 15 economists surveyed by Bloomberg predicted no change. Yet when Wheeler boosted rates to 3.50% from 3.25% the kiwi plunged to 0.8610 from 0.8700.

Two factors weighed. The first was a fresh and aggressive effort to jawbone. Wheeler said the current NZD level is unjustified and unsustainable. He added that the kiwi could have a big fall. Some jawboning was expected but it's a tactic that tends to work best when it's going with the momentum of the market and the recent failure at the 2011 high has awakened the bears.

The second factor was likely the larger one and it was Wheeler saying the “The speed and extent to which the OCR will need to rise will depend on the assessment of the impact of the tightening in monetary policy to date.”

What changed from the previous statement was the second half of that statement. In sum, “assessing” is something that will take time and it's a hint that the RBNZ is now on the sidelines.

The market had been pricing in another 40-50 bps in rate hikes in the coming year but that's now less certain.

We have been bearish on the New Zealand dollar and the fundamental case is now beginning to align with the technical picture. The fall today also breaks the 100 and 55-day moving averages with no firm support below.

Up next is Japanese trade balance at 2350 GMT. The market is looking for a 642-yen deficit.