The New Zealand Dollar breaks lower after Australia's rate hike

On Tuesday, the New Zealand Dollar (NZD) experienced a significant downturn after Australia hiked its benchmark interest rate. The Reserve Bank of Australia (RBA) increased its cash rate to 4.60%, the highest level since 2011, in a unanimous decision. The Australian economy is reportedly slowing, and RBA Governor Bullock hinted at less future tightening, with futures pricing a cash rate above 5% by May 2027.

New Zealand's central bank, the Reserve Bank of New Zealand (RBNZ), had already raised its Official Cash Rate (OCR) to 2.75% on September 2, its second consecutive hike, but the Kiwi depreciated when RBNZ Governor Breman stated that the timing of any further increase was highly uncertain. The odds of an October rate hike dropped to around 36% from 65% following the RBNZ meeting.

RBNZ Governor Breman had previously warned that higher crude oil prices could push near-term inflation above the bank's expectations. Currently, the OCR is 1.85 points below Australia's cash rate and a full point under the Federal Reserve's lower bound, which makes the Kiwi's reaction on October 28 dependent on whether the RBNZ indicates further hikes.

The RBNZ's neutral rate is between 3% and 3.5%, and a 3.00% hike would still be near the lower end of that range. While the RBNZ may become firmer than initially suggested, the guidance will likely be the only surprise factor. Upcoming economic data releases, including August building permits and the ANZ-Roy Morgan consumer confidence index, provide limited weight compared to US events, such as the Fed's October odds and the US jobs report.

The bias is short-term, with 0.5700 acting as the primary resistance and 0.5600 as the initial support level. The NZD's value is influenced by the health of the New Zealand economy, the central bank's policies, the performance of China, and dairy prices.