NZD/USD flys to fresh highs for the month on dovish Fed

With a dovish 25 bp hike, markets are pricing for the Fed's tightening cycle nearing an end and the US Dollar was sold off to test the bottom end of 102 DXY. Consequently, the NZ Dollar flew to a fresh high for the month at 0.6282 and was up from a low of 0.6171.

Today’s 25 bp hike was largely anticipated, but only aftermarket expectations whipsawed in recent weeks and the Federal Open Market Committee Statement flags “some additional policy firming” with the dot plot median pointing to one more hike. 

Before today´s Federal Reserve event, markets were pricing in a year-end target rate of 4.36%. This has dropped in volatile reactions to the statement to 4.26%. At the time of writing, US 2-year Treasury yields are down to 4.77%, dropping from 4.259% on the day to print a low of 3.958%. Consequently, the US Dollar index, DXY, fell to a low of 102.065 from a high of 103.265 and the bird took off. 

Fed event highlights

• The median forecast shows rates at 5.1% end-2023, 4.3% end-2024.
• 'Some additional policy firming may be appropriate.'
• FOMC deletes reference to ongoing increases.
• US banks are sound, resilient but events to weigh on growth.
• Likely to see tighter credit conditions that weigh on economic activity, hiring and inflation.

Meanwhile, Fed´s chairman Jerome Powell spoke to the press:

• Powell speech: Isolated banking problems can threaten banking system if left unaddressed

• Powell speech: Recent banking events will result in tighter credit conditions
• Powell speech: Before banking stress, thought we would have to raise terminal rate
• Powell speech: Tightening in credit conditions may mean monetary tightening has less work to do
• ´´If we need to raise rates higher we will, for now we see likely hood of credit tightening.´´

Analysts at ANZ Bank explained said, for NZD specifically, ´´it’s still a bit of a tug of war between stock and flow, with the bullish flow traders citing the cyclone rebuild, remoteness from global banking issues, and Reserve Bank of New Zealand hawkishness, and the bearish stock traders citing our current account deficit, one-trick pony housing-centric economy, and credit ratings at risk.´´