• NZD/USD perched near the highs of the week ahead of FOMC.
• US Dollar is under pressure amid poor PMIs while NZD is supported by a hawkish RBNZ. 

NZD/USD rallied to a high of 0.6236 on Wednesday, from a low of 0.6123 and was approaching its strongest levels in nearly three months after the Reserve Bank of New Zealand delivered a supersized 75 basis point rate hike to get ahead of inflation.

That hike was the largest since the RBNZ introduced the OCR in 1999 and brought the policy rate to a 14-year high of 4.25%. Meanwhile, in the statement, it was explained that the central bank's board expects the cash rate to peak at 5.5% in September 2023 according to its latest forecasts.

The members of the board had considered a 100Bp rate rise which fuelled the rally in the bird. Stubbornly high inflation and near-record-low unemployment in New Zealand supported the case for a more aggressive move. Finance Minister Grant Robertson said before the event that the country was well-positioned to withstand a global recession due to robust growth and a stable financial system.

The projected peak of 5.5% was well above consensus which led to the two-year swap rates to surge 29 basis points to 5.285%, the biggest daily jump since 2009. Analysts at ANZ Bank have revised their forecasts higher, now expecting an additional 50 bp increase in April and a 25 bp one in May, which would take the peak to 5.75%.

FOMC minutes eyed

Meanwhile, the US Dollar sold off on Wednesday in the early New York trade on the back of PMI's that are giving the bears a head start before the FOMC minutes are released. The overall data, for the most part, was solid but the emphasis was put on the shocking result in the US Manufacturing PMI that missed expectations by a mile:

• US: S&P Global Manufacturing PMI drops to 47.6 in November vs. 50 expected

In the prior statement, it read "In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments."

This statement gave rise to volatility in markets as investors positioned for a softer approach from the Fed which Chair Jerome Powell pushed back against in his presser by suggesting that there will likely be a higher terminal rate. Therefore, the minutes will be scrutinised for clarity in this regard. ''We expect the November FOMC meeting minutes to shed further light on the FOMC's deliberations regarding the expected downshift in the pace of rate increases in upcoming meetings,'' analysts at TD Securities said. 

''But above all, we look for the minutes to place a lot of emphasis on the likelihood that the terminal rate will need to end up higher than anticipated initially. The Fed still needs to grind down the labour market to align wage and household spending growth with rates more consistent with the inflation target.''