NZD/USD rebounds modestly after RBNZ’s 50 bps rate cut-led plunge

• The New Zealand Dollar drops sharply after the RBNZ cut rates by 50 basis points.
• The central bank leaves the door open to further interest rate reductions.
• NZD/USD finds some support but remains down 0.5% at the time of writing.

The New Zealand Dollar (NZD) comes under heavy pressure on Wednesday after the Reserve Bank of New Zealand (RBNZ) lowered the Official Cash Rate (OCR) by 50 basis points (bps) to 2.50% from 3.00%. Markets had been expecting a smaller 25 bps move.

The surprise “jumbo” cut came alongside a clearly dovish message, with the central bank stating it “remains open to further reductions in the OCR as required” to bring inflation sustainably back to the 2% midpoint target over the medium term.

This dovish guidance triggered a wave of selling in the New Zealand Dollar, with NZD/USD plunging to 0.5737, its lowest level since April. The currency recovers partially in the European session, trading around 0.5770 at the time of writing, down 0.5% on the day.

ING analysts said that "we are quite surprised by the decision, as we thought the lack of inflation data for the third quarter would warrant more caution with cuts this month. Instead, it appears that the RBNZ is firmly focused on supporting economic activity, and the larger-than-expected 2Q GDP contraction was enough to trigger an outsized cut." 

Meanwhile, OCBC economists note that the explicit openness to further easing could continue to weigh on the Kiwi in the coming weeks.

Markets now await the release of the US Federal Open Market Committee (FOMC) Minutes at 18:00 GMT, along with speeches from several US Federal Reserve (Fed) officials, for further guidance on the future monetary policy outlook.

Meanwhile, the budget impasse continues as the partial US government shutdown enters its second week. The Senate is set to vote again on Wednesday on the same competing bills, while a White House memo indicates that the 750,000 furloughed federal employees are not guaranteed back pay.

NZD/USD technical analysis: Technical rebound or bullish recovery?

NZD/USD daily chart. Source: FXStreet.

NZD/USD is finding support towards the lower bound of a bearish channel visible on the daily chart at 0.5737, but the move remains a technical rebound at this stage. The Kiwi pair will need to get back above Tuesday's peak at 0.5853 before considering a more significant rebound to then target the 100-day Simple Moving Average (SMA), currently at 0.5945, and the upper bound of the downtrend channel towards 0.5970.

A fall below the channel, on the other hand, would accentuate downward pressure, with the risk of a fall towards the April 9 low at 0.5486.