NZD/USD Price Forecast: Faces selling pressure amid caution ahead of RBNZ policy announcement
- NZD/USD surrenders its early gains as the US Dollar trades firmly.
- The US government shutdown is expected to remain a drag on the US Dollar.
- The RBNZ is expected to cut its OCR by 25 bps to 2.75% on Wednesday.
The NZD/USD pair gives up its early gains and falls to near 0.5815 during the European trading session on Monday. The Kiwi pair faces selling pressure as investors turn cautious ahead of the monetary policy announcement by the Reserve Bank of New Zealand (RBNZ) on Wednesday.
Traders are increasingly confident that the RBNZ will cut its Official Cash Rate (OCR) by 25 basis points (bps) to 2.75%. This would be the second straight interest rate cut by the RBNZ in a row.
RBNZ dovish bets are intensified by declining New Zealand (NZ) Gross Domestic Product (GDP) growth. Last month, Stats NZ reported that the economy declined by 0.9% in the second quarter of the year, the same pace at which it expanded in the first quarter. Economists expected the NZ GDP growth have contracted by 0.3%.
Meanwhile, the US Dollar (USD) surges as the political crisis in France has increased its safe-haven demand. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades 0.7% higher to near 98.40.
On the domestic front, risks of government shutdown linger with the White House threatening to announce mass lay-offs.
NZD/USD fails to extend its four-day winning streak and faces pressure near 0.5840 on Monday. The Kiwi pair faces selling pressure near the 20-day Exponential Moving Average (EMA), which trades around 0.5847, indicating that the near-term trend is bearish.
The 14-day Relative Strength Index (RSI) recovers above 40.00. A fresh bearish momentum would emerge if the RSI fails to hold above that level.
Going forward, the asset could slide towards the September 26 of 0.5754 and the round-level support of 0.5700, if it breaks below the round-figure cushion of 0.5800.
In an alternate scenario, the Kiwi pair would rise towards the June 19 high of 0.6040 and the September 11 low of 0.6100 if it manages to break above the psychological level of 0.6000.
NZD/USD daily chart
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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
Sagar Dua
FXStreet
Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.
