NZD/USD recovery loses steam at 0.5980

-New Zealand Dollar’s recovery is losing steam right below the 0.6000 psychological level.
A hawkish cut by the RBNZ boosted the Kiwi’s recovery during Wednesday’s Asian session.
-A strong US Dollar, buoyed by upbeat US data and easing trade fears, is supporting the US Dollar.

Guillermo Alcala FXStreet

The New Zealand Dollar is paring some losses on Wednesday after having lost more than 1% on Tuesday. A hawkish RBNZ statement has provided some support to the Kiwi, but the overall USD strength is limiting upside attempts.

The bank trimmed rates by 0.25% earlier today, to 3.25% as widely expected. This is its fifth consecutive cut from the 5.5% peak level in August last year.

The RBNZ delivers a hawkish cut

RBNZ’s acting Governour Hawkesby surprised investors, stating that the bank has lowered rates a considerable way and that they might now be close to neutral. These comments revealed a significant tone change from the previous meeting and triggered a sharp NZD rebound on Wednesday’s Asian session.

The pair, however, is losing momentum as it nears the 0.6000 psychological level, weighed by a firm US Dollar. The Grenback is trading higher across the board, as strong Consumer Confidence figures and easing concerns about trade wars have offset US debt woes, at least for now.

The US Dollar Index, which measures the value of the ISD against a basket of the world’s most traded currencies, has bounced about 1% higher over the last trading sessions. The focus now is on the minutes of the last Fed meeting, due later today, which will frame Friday’s all-important US PCE inflation release.

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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