When the Reserve Bank of New Zealand raised interest rates by 50 basis points in April while most of the street economists were looking for a 25bp increase, the NZD sold off. In contrast, the Bank of Canada hiked by 50bp as widely expected and the CAD rallied.
According to BNP Paribas, this challenges the conventional belief that front-end rate differentials are the main drivers of FX. In a recent research note, the bank’s G10 FX strategist observed that markets were longer the CAD than the NZD ahead of their respective central bank decisions and concluded that markets were trading expectations regarding the level of terminal rates in this cycle.
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