NZD flat as markets begin to turn attention to fed policy update

Daily Currency Update

The NZD traded flat through trade on Tuesday, unable to hold gains near US$0.61 yet finding support on moves below US$0.6050 in what was a largely quiet and uneventful day. Reports China asked big banks to cut deposit rates last week and rumours the People's Bank of China is preparing to lower the reserve requirement ratio forced the Chinese yuan toward year-to-date lows as investors prepare for a fresh round of liquidity to hit the market. The weaker yuan spilled over into NZD price action capping gains and forcing investors to track positions leading into the Federal Reserve policy meeting. While flat against most counterparts the NZD moved sharply lower against the AUD after the RBA policy adjustment. The NZD fell through A$0.9150, marking intraday lows at A$0.91. With marco forced weighing on the NZD and interest rates converging the NZD/AUD outlook should retain a negative bias through the end of the year. We anticipate a break below A$0.90 and toward $A0.88 over the coming months.
Our attentions turn now to next week's Federal Reserve and the Federal Open Market Committee's latest policy update. Expectations are for policy makers to announce a pause in the tightening cycle, affording more time to assess the impact of recent rate hikes with the hope of cushioning any economic downturn. With a 75% probability of a pause priced in another Fed rate hike will catch investors and likely force the NZD back toward supports at US$0.5980/US$0.60. However, should the Fed opt to skip forward into July before issuing another rate hike we could see the NZD jump through US$0.61 and toward resistance at US$0.62. In the interim commentary from RBA Governor Lowe Chinese Trade Data and a Bank of Canada policy update will provide direction.