NZD/USD rallies to fresh highs beyond 0.5920 amid USD weakness

The New Zealand Dollar rallies to fresh highs on USDollar weakness, upbeat data from China.
The US Dollar remains pinned near lows as investors brace for a Fed rate cut next week.
China's trade surplus beat expectations earlier on Monday, increasing bullish pressure on the NZD.

Guillermo Alcala FXStreet

The New Zealand Dollar has opened the week on a strong note, fuelled by US Dollar weakness, as investors brace for a Federal Reserve rate cut next week, and strong trade balance figures from China, New Zealand’s main trading partner.

The pair is trading higher for the second consecutive day, reaching intra-day highs above 0.5920, its highest levels since August 19. Friday’s impulsive rebound from levels below 0.5840 suggests that the pair might be on track for a deeper recovery.

Fed easing hopes keep the USD on its back foot

On Friday, a weaker-than-expected US Nonfarm Payrolls report confirmed that the US labour market has lost momentum and cemented hopes for a Fed cut next week. Speculation about the possibility of a 50 basis point cut returned to the market, weighing heavily on the US Dollar.

Net employment creation declined in the US to 22K in August, from 79K in July, but June’s reading was revised to a 13K job loss for the first time since 2020, in the height of the pandemic. Apart from that, the US Unemployment Rate increased to 4.3%, from 4.2% adding pressure on the central bank to ease its monetary policy.

The New Zealand Dollar, on the other hand, has been boosted by a larger-than-expected Trade Surplus in China, which rose to USD 102.33 billion against market expectations of a USD 99.2 billion surplus.

Central banks FAQs

What does a central bank do?

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%.

What does a central bank do when inflation undershoots or overshoots its projected target?

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.

Who decides on monetary policy and interest rates?

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%.

Is there a president or head of a central bank?

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.

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