NZD/USD dives to fresh lows below 0.5840 as the US Dollar appreciates

The New Zealand Dollar resumes its bearish trend against the USD and hits fresh three-week lows at 0.5835.
New Zealand's authorities nominated Dr Anna Brenan as the next RBNZ governor on Wednesday.
The US Dollar appreciates after Fed's Powell warns that further rate cuts are not guaranteed.

Guillermo Alcala FXStreet

The New Zealand Dollar is accelerating its downtrend against a firmer US Dollar, weighed by moderate risk aversion. The pair extended its reversal from Tuesday’s highs, right below 0.5870, into fresh three-week lows at 0.5835 so far.

Dr Anna Brennan, Deputy Governor of the Swedish Central Bank, was nominated as the next Governor of the Reserve Bank of New Zealand earlier on Wednesday, to replace former governor Andrew Orr, who resigned unexpectedly earlier this year.

The RBNZ might cut rates further before Governor Brennan takes charge

Brennan is expected to begin her tenure on December 1. Until then, the acting governor, Christian Hawkesby, will oversee the October 8 and November 26, which are likely to deliver further interest rate cuts considering New Zealand’s deteriorating economic outlook.

In the US, flash PMI failed to support the US Dollar on Tuesday, as both the services and the manufacturing sectors’ activity showed softer growth in September. The US Dollar, however, drew some support from Fed Chair Jerome Powell, who warned about the upside risks to inflation and hinted at a gradual easing cycle, rather than the steep one anticipated by the markets

A somewhat sourer sentiment is driving markets on Wednesday, pushing the US Dollar moderately higher in the absence of key fundamental releases, as investors await US GDP data on Thursday and the PCE Price Index, the Fed’s inflation gauge of choice.

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

Guillermo Alcala

FXStreet

Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.

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