- NZD/USD meets with a fresh supply on Tuesday amid some follow-through USD buying.
- Bets for an early RBNZ rate cut and China’s economic woes contribute to the downfall.
- Traders now look forward to Fed Chair Jerome Powell’s speech for short-term impetus.
The NZD/USD pair comes under some renewed selling pressure during the Asian session on Tuesday and momentarily slides below mid-0.6000s for the first time since mid-May. Spot prices now seem to have confirmed a breakdown through the 50-day Simple Moving Average (SMA) and seem vulnerable to prolong a three-week-old downtrend amid some follow-through US Dollar (USD) buying.
Concerns that a Trump presidency would be more inflationary than a Biden administration pushed the yield on the benchmark 10-year government bond to its highest level in a month on Monday. This, in turn, assists the USD to build on the overnight solid rebound from a multi-day low. The New Zealand Dollar (NZD), on the other hand, is weighed down by expectations that the Reserve Bank of New Zealand (RBNZ) will cut rates earlier than projected.
Apart from this, China's economic woes further contribute to driving flows away from antipodean currencies, including the Kiwi. The USD bulls, meanwhile, might hold back from placing aggressive bets and prefer to wait for more cues about the Federal Reserve's (Fed) further policy decisions amid rising bets for an imminent start of the rate-cutting cycle in September. Hence, the focus will remain glued to Fed Chair Jerome Powell's speech later today.
Apart from this, Tuesday's US economic docket – featuring JOLTS Job Openings data – might influence the USD price dynamics and provide some impetus to the NZD/USD pair. The focus will then shift to the FOMC meeting minutes on Wednesday and the release of the closely-watched US monthly employment details – popularly known as the Nonfarm Payrolls (NFP) report – on Friday. This, in turn, will determine the near-term trajectory for the buck and the currency pair.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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