14.07.202121:41 Forex Analysis & Reviews: NZD/USD. Rise of the kiwi: The Reserve Bank surprised investors again

The Reserve Bank of New Zealand surprised market participants again today. It should be noted that the RBNZ "knows how to surprise", although this quality does not characterize the central bank on the positive side. A weak level of communication, as a rule, provokes increased volatility, exciting the markets. And yet the fact remains that the New Zealand central bank gave a surprise to NZD/USD traders once again, providing significant support to the national currency.

So, today the RBNZ announced the termination of the incentive program for the purchase of bonds worth 100 billion New Zealand dollars. This news caught the majority of market participants by surprise, who were apparently set up for a "passing " meeting. The program was supposed to be valid until the summer of next year, but the members of the central bank came to the conclusion that the national economy no longer needs additional incentives. Thus, the RBNZ was at the forefront of the central banks of the leading countries of the world – it was the first to completely stop QE. Commenting on the decision, RBNZ Governor Adrian Orr said that the latest published macroeconomic data indicate that the New Zealand economy "remains strong". Most of the coronavirus restrictions have been lifted in the country (while the country's borders are still "locked"), and the last case of COVID-19 was registered at the end of winter. The combination of these factors allowed the country's economy to recover at a faster pace.

Against the background of such hawkish decisions, many analysts suggested that the RBNZ's next step would be to raise the interest rate. And here the New Zealand central bank will also be at the forefront of events. Actually, Adrian Orr did not rule out such a scenario. But at the same time, he stressed that the central bank will consider tightening policy only after its "targets for inflation and employment are steadily achieved."

According to the latest data, the unemployment rate in New Zealand fell in the first quarter of this year to 4.7%, while according to general forecasts, this indicator should have remained at the fourth quarter's level, that is, at 4.9%. The indicator of the increase in the number of employees has grown by 0.6% on a quarterly basis (with a forecast of growth to 0.3%). De facto, unemployment has been declining for the second quarter in a row, and at a faster pace. As for the inflation indicators, there are also positive trends here. The latest data on the growth of inflation in New Zealand also supported the kiwi. Positive dynamics was recorded in the first quarter of this year: in quarterly terms, the consumer price index increased to 0.8% (from the previous value of 0.6%), in annual terms - to 1.5% (with a forecast of growth to 1.4%).

Given this dynamic, some analysts have suggested that the RBNZ may raise the rate as early as August or at one of the autumn meetings. In my opinion, such a scenario is very likely, given the reputation of the RBNZ. For example, the summer before last, the New Zealand central bank thoroughly shook up the markets, reducing the interest rate by 50 basis points at once without any warning. At that time, the financial world was feeling the consequences of the trade war between the United States and China. By the way, the central bank of New Zealand was actually the first among the central banks of key countries of the world that decided to ease monetary policy – it was then followed by the Federal Reserve, European Central Bank, Reserve Bank of Australia and some other central banks. Then Adrian Orr said that New Zealand may well have to deal with negative rates – in the event of a crisis, the central bank may reduce the key interest rate to -0.35%.

And now, in 2021, New Zealand's central bank can also become a "pioneer" - only this time in the issue of tightening the parameters of monetary policy.

This fundamental factor will provide significant support to the kiwi, even against the greenback. Moreover, Fed Chairman Jerome Powell still takes a dovish position, exerting background pressure on the US dollar. A few hours before Powell's speech in Congress, his report was published in the press, which turned out to be very "soft" and pessimistic. For example, according to Powell, "the US economy still needs help and is far from the point of reducing quantitative easing." Powell also noted that the US labor market is "still far" from the progress that Fed members want to see before cutting incentives. Powell also expectedly ignored the record rise in inflation, saying that key indicators in this area "will decline in the coming months."

Thus, the current fundamental background contributes to the NZD/USD pair's further growth - both in annual and monthly terms. The first target of the upward movement is the level of 0.7070 - this is the middle line of the Bollinger Bands indicator, which coincides with the Kijun-sen line on the daily chart. The main target is the 0.7130 mark, which is the lower border of the Kumo cloud on the same timeframe.