August 17, 2021 14:26:39

Tomorrow’s RBNZ meeting was always going to be a seminal risk event in many ways. Markets had fully priced in the first 25bp interest rate rise by a major central bank in the developed world since the start of the pandemic crisis. In fact, it was set to be the first hike in seven years by the RBNZ, with at least one more hike fully priced to follow by year end and an aggressive 90bp of tightening by the middle of next year.

But everything changed overnight with a single case of Covid-19 in Auckland pushing the government to go “hard and early” in announcing a national lockdown for three days, in line with their “zero Covid” strategy. With less than 20% of the population fully vaccinated, speed is of the essence.

Money markets are now pricing in around a 65% chance of a 25bp rate move tomorrow and only 63bp of tightening by mid-2022. The sharp drop in unemployment and much better than expected move higher in inflation was forcing the RBNZ into returning the policy dial back to a non-emergency, more normal one. So, the high bar to a hawkish surprise has been lowered with all eyes on the rate decision and forward guidance.

NZD/USD plunges to the bottom of the range

The kiwi was down close to 1.7% earlier today with some economists now believing the RBNZ will leave rates on hold tomorrow. NZD/USD had been trading towards the top of the recent range above 0.70, even as the dollar found a small bid this week on the Delta variant spread and slowing Asia-Pacific growth expectations. But the pair had failed to break higher above the 50-day SMA towards the 200-day SMA at 0.7110 which means prices are still vulnerable while trading below this resistance.

The pair is now currently trading at the bottom of the range around 0.69/0.6880 and just below previous pivot lows from March. This is an obvious key support zone with a more cautious RBNZ potentially pushing prices towards fresh long-term lows towards 0.6797 and 0.6710.

AUD/NZD fails at resistance zone

After failing to make new cycle lows below the December bottom at 1.0418, AUD/NZD has jumped dramatically higher today breaking above a short-term trendline. Even though the RBA minutes released earlier today suggested a more dovish debate under the surface, the kiwi has been smashed with prices spiking up to 1.0541.

This is more or less the February low and also a Fib level of the December to March move so is now strong resistance as prices have retraced back to 1.05. Next resistance above sits at the May low just below 1.06 if the RBNZ disappoint. Any signs the bank look through the lockdown uncertainty will see aussie bears aim to retest the lows again.