NZD/USD adds to dovish RBNZ-inspired losses; slumps to four-month low around 0.5820 area
- NZD/USD attracts heavy selling in reaction to the RBNZ’s dovish 25 bps rate cut this Wednesday.
- Some follow-through USD buying further contributes to the steep decline amid a softer risk tone.
- Traders now look to the FOMC Minutes for a fresh impetus ahead of the Fed’s Powell on Friday.
The NZD/USD pair adds to the dovish Reserve Bank of New Zealand (RBNZ)-inspired losses and dives to its lowest level since mid-April during the first half of the European session on Wednesday. Spot prices currently trade around the 0.5830-0.5825 region, with bears looking to extend the downward trajectory below a technically significant 200-day Simple Moving Average (SMA).
As was widely expected, the RBNZ decided to lower the official cash rate (OCR) by 25 basis points (bps), to 3.00% at the end of the August policy meeting earlier today. Meanwhile, the accompanying policy statement revealed that the Monetary Policy Committee voted 4-2 for the quarter-point cut, with a minority favouring a larger 50 bps rate reduction. Furthermore, the RBNZ projected inflation returning to target by mid-2026, and highlights spare capacity, stalled growth, and cautious behavior as downside risks.
Adding to this, the central bank stated that if medium-term inflation pressures continue to ease in line with the projection, the Committee expects to lower the OCR further. This, in turn, prompted aggressive selling around the New Zealand Dollar (NZD) amid a slight deterioration in the global risk sentiment. This, along with some follow-through US Dollar (USD) buying, turns out to be another factor that contributes to the heavily offered tone surrounding the NZD/USD pair and the steep intraday decline.
The USD bulls, however, seem reluctant and opt to wait for more cues about the Federal Reserve's (Fed) rate-cut path. Hence, the focus shifts to the release of the FOMC Minutes, due later during the US session. Apart from this, Fed Chair Jerome Powell's speech at the Jackson Hole Symposium might offer a fresh insight into the central bank's policy outlook. This, in turn, will drive the USD and provide a fresh impetus to the NZD/USD pair. Nevertheless, the fundamental backdrop backs the case for further near-term losses.
RBNZ FAQs
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.
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.
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.
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
Haresh Menghani
FXStreet
Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.
