AUD/NZD gains ground above 1.1750 as RBNZ holds rates, Australian employment report awaited

AUD/NZD gains momentum to around 1.1760 in Wednesday’s Asian session.
The RBNZ kept the Official Cash Rate unchanged at 2.25% on Wednesday, as expected.
The Australian employment report for January will take center stage on Thursday.

Lallalit Srijandorn FXStreet

The AUD/NZD cross rises to near 1.1760 during the Asian trading hours on Wednesday. The New Zealand Dollar (NZD) edges lower against the Australian Dollar (AUD) after the Reserve Bank of New Zealand (RBNZ) interest rate decision. The Australian employment report for January will be closely watched later on Thursday.

As widely expected, the RBNZ decided to hold its Official Cash Rate (OCR) at 2.25% after concluding the February monetary policy meeting on Wednesday. The New Zealand central bank said in its post-meeting statement that "if the economy evolves as expected, monetary policy is likely to remain accommodative for some time.”

RBNZ new Governor Anna Breman said during the press conference that OCR track is based on how the central bank see economy evolving. Breman added that there is possibility of rate hike by end of year.

The Kiwi remains weak after the rate decision as traders pared expectations on RBNZ rate hikes. According to Bloomberg, markets have priced a roughly three-in-four chance of a hike by October shortly after the decision, down from 90% prior.

Traders will take more cues from the Australian employment report on Thursday. The Unemployment Rate is projected to rise to 4.2% in January from 4.1% in December. The Employment Change is estimated to show an increase of 20K during the same period. Any signs of weakening in the Australian labor market could weigh on the Aussie against the NZD in the near term.

RBNZ FAQs

What is the Reserve Bank of New Zealand?

The Reserve Bank of New Zealand (RBNZ) is the country’s central bank. Its economic objectives are achieving and maintaining price stability – achieved when inflation, measured by the Consumer Price Index (CPI), falls within the band of between 1% and 3% – and supporting maximum sustainable employment.

How does the Reserve Bank of New Zealand’s monetary policy influence the New Zealand Dollar?

The Reserve Bank of New Zealand’s (RBNZ) Monetary Policy Committee (MPC) decides the appropriate level of the Official Cash Rate (OCR) according to its objectives. When inflation is above target, the bank will attempt to tame it by raising its key OCR, making it more expensive for households and businesses to borrow money and thus cooling the economy. Higher interest rates are generally positive for the New Zealand Dollar (NZD) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken NZD.

Why does the Reserve Bank of New Zealand care about employment?

Employment is important for the Reserve Bank of New Zealand (RBNZ) because a tight labor market can fuel inflation. The RBNZ’s goal of “maximum sustainable employment” is defined as the highest use of labor resources that can be sustained over time without creating an acceleration in inflation. “When employment is at its maximum sustainable level, there will be low and stable inflation. However, if employment is above the maximum sustainable level for too long, it will eventually cause prices to rise more and more quickly, requiring the MPC to raise interest rates to keep inflation under control,” the bank says.

What is Quantitative Easing (QE)?

In extreme situations, the Reserve Bank of New Zealand (RBNZ) can enact a monetary policy tool called Quantitative Easing. QE is the process by which the RBNZ prints local currency and uses it to buy assets – usually government or corporate bonds – from banks and other financial institutions with the aim to increase the domestic money supply and spur economic activity. QE usually results in a weaker New Zealand Dollar (NZD). QE is a last resort when simply lowering interest rates is unlikely to achieve the objectives of the central bank. The RBNZ used it during the Covid-19 pandemic.

Author

Lallalit Srijandorn

FXStreet

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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