Hawkish RBNZ Rate Outlook Underpins NZD, Market Sentiment Stabilises

The kiwi leapt higher, taking the lead in G10 FX space, as the RBNZ raised the OCR by 25bp and forecast more aggressive interest-rate action for the period ahead. The MPC now expect their policy rate to rise faster and peak at a higher point, with the balance sheet runoff officially set to commence through a combination of bond maturities and managed sales. The statement highlighted that the decision to hike the OCR by 25bp rather than 50bp was "finely balanced," while the Committee was "willing to move the OCR in larger increments if required." Explicit readiness to deliver bold tightening steps and a relatively hawkish OCR track underscored the Reserve Bank's resolve in combating soaring inflation.

• AUD/NZD took a nosedive after the RBNZ published their Monetary Policy Statement. New Zealand policy decision was announced after Australia reported unimpressive wage price (WPI) data, which prompted participants to pare RBA rate hike bets. The conjunction of Antipodean developments weighed on 2-Year Australia/New Zealand swap spread, which filtered through into AUD/NZD price action. The rate bottomed out within touching distance from its 50-DMA, which has remained intact since early December, before trimming some losses.
• Nonetheless, the AUD is heading for the London session as the second best G10 performer after its Antipodean cousin. The Aussie dollar unwound its marginal post-WPI dip registered against major peers, as the spillover from hawkish RBNZ decision and improving risk environment extended a helping hand. The recovery in market sentiment (U.S. e-mini futures operated in the green) lent support to the broader high-beta FX space.
• Demand for safe haven assets waned, with the greenback struggling for any topside impetus. JPY and EUR also came under pressure. Note that liquidity in Asia hours was sapped by a market holiday in Japan. Overnight news flow provided little to alter the familiar narrative on the Russia-Ukraine conflict, with participants assessing the first barrage of sanctions imposed by the West.
• The yuan ignored a marginally stronger PBOC fix. Spot USD/CNH crept higher after China's central bank set the reference rate 17 pips below sell-side estimate, only to gradually return to virtually neutral levels thereafter.
• While geopolitical risk will continue to draw attention today, data highlights include final EZ CPI & German consumer confidence. Speeches are due from Fed's Daly, ECB's de Guindos, de Cos & Villeroy and BoE's Bailey, Broadbent, Haskel & Tenreyro.