NZD/USD gives away gains, returns to 0.5920 as the US Dollar firms up
- The New Zealand Dollar extends losses to test 0.8920, the bottom of the previous three days' trading range.
- The US Dollar remains firm on Thursday despite low inflation data and Fed easing hopes.
- RBNZ Governor Hawkeshby reiterates that the Bank will cut its OCR to 2.50% by year-end.
The New Zealand Dollar’s reversal from 0.5965 accelerated on the European Morning session on Thursday, with the pair retracing Wednesday’s gains, and bears testing the bottom of the last few days’ trading range, at the 0.8920 area.
The US Dollar is the strongest performer in a quiet trading session on Thursday, despite market expectations that US Consumer Prices, due later today, will set the conditions for the Federal Reserve to cut rates by at least 25 basis points next week.
An unexpected contraction of US monthly producer prices strengthened the case for further Fed easing in the coming months, but failed to weigh on the US Dollar. The USD Index, which measures the value of the Greenback against the world’s most-traded currencies, is trading more than 0.75% higher from the multi-week lows hit on Tuesday.
Today, all eyes are on the US Consumer Prices Index (CPI) release, which is expected to show moderately higher inflationary pressures, yet with yearly inflation remaining below the 3% level, and with the core CPI unchanged from July, at 0.3% on the month, and 3.1% year-on-year.
In New Zealand, some dovish comments by RBNZ Governor Hawkesby have added bearish pressure on the NZD. Hawkeshby reiterated that the bank will lower the Official Cash Rate (OCR) by a further half-point, to 2.5% by the end of the year, in a speech to the Financial Services Council but that the pace of the rate cuts will depend on the economic conditions.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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.
