RBNZ Takes Centre Stage, Covid Traffic Light Settings Decision Due

Tuesday was a bullish outside day for NZD/USD, as the rate snapped a four-day losing streak on the eve of RBNZ monetary policy review. The rate drew support from firmer crude oil prices as WTI climbed above $100/barrel. It extended gains after the release of U.S. inflation data, as core CPI growth marginally missed expectations, topped out at $0.6890 just after the WMR fix and trimmed gains into the close.

• Economists and the market are at odds when it comes to the size of today's OCR hike, but all agree that the policy rate will go up. While most analysts see a 25bp move as more likely, the OIS strip prices a ~72% chance of a 50bp rate rise. It is a virtual coin toss, as moon-bound inflation is putting the Reserve Bank's inflation fighting credibility to a test, while weak consumer and business confidence, the impact of rising mortgage costs on household budgets and retreating housing market call for a more measured approach (see our preview for more details).
• It is reasonable to expect volatility after the RBNZ decision, given how divided participants are on the most likely outcome. Implied NZD/USD overnight volatility rose to its highest point since Mar 1, 2021 yesterday before easing off a little.
• While the RBNZ decision is poised to steal the show today, the Cabinet will reveal its decision on Covid-19 traffic light system settings ahead of Easter holidays. Officials said earlier that those settings could be changed separately for different parts of the country.
• NZD/USD trades at $0.6857, a touch higher on the day. From a technical perspective, a key near-term resistance has been defined at $0.7034, the high print of Apr 5. Bears look for a sell-off past yesterday's low of $0.6806, which coincides with the ascending 50-DMA. A break below those levels would expose the 50% retracement of the Jan 28 - Apr 5 rally at $0.6782.