NZD/USD pulls back to levels near 0.5800 with the RBNZ decision eyed
- The New Zealand Dollar approaches 0.5800 after rejection at 0.5845.
- Investors are split on whether the RBNZ will cut rates by 25 or 50 bps on Wednesday.
- The US Dollar is outperforming its peers, favoured by political and fiscal woes in France and Japan.
The New Zealand Dollar’s rally met sellers at the 0.5845 area on Monday, and the pair is trading lower on Tuesday. The Kiwi has retraced the previous day’s gains and approaches the 0.5800 line as investors turn their focus to the RBNZ’s monetary policy decision, due on Wednesday.
The Reserve Bank of New Zealand is widely expected to lower borrowing costs further on Wednesday, but the market is split on whether it will be by 25 or 50 basis points
Weak New Zealand data feed hopes of a jumbo cut on Wednesday
The bank had been laying the ground for further monetary easing after its September meeting. Still, pressure for a jumbo (50 bps) rate cut in October has grown following the 0.9% GDP contraction in the second quarter. The New Zealand Dollar is struggling in this context.
The US Dollar, on the other hand, is firming up this week, unfazed by the US government shutdown or market expectations that the Fed will cut rates in late October, and is likely to do so again in December.
Growing concerns about France’s public finances after the departure of the Prime Minister Sebastial Lecornu are hurting the Euro. In Japan, hopes that the new leader of the LDP party might hamper the BoJ’s tightening plans have sent the Yen tumbling, providing a further impulse for the Greenback.
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
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.
