NZD/USD softens below 0.5650 as Trump tariff threat looms

NZD/USD weakens to near 0.5635 in Tuesday’s Asian session.
Trump raised aluminum and steel tariffs to 25%, from a previous 10%.
The RBNZ is expected to deliver a third consecutive supersized rate cut later this month.

Lallalit Srijandorn FXStreet

The NZD/USD pair remains under selling pressure around 0.5635 during the Asian session on Tuesday. The concerns about potential trade wars under US President Donald Trump administration continue to undermine the New Zealand Dollar (NZD). Later on Tuesday, Federal Reserve (Fed) Chair Jerome Powell’s semi-annual testimony will be in the spotlight.

Trump said on Sunday that he will announce new 25% tariffs on all steel and aluminium imports into the US on Monday that would affect “everybody’, including its largest trading partners, Canada and Mexico.

New Zealand Finance Minister Nicola Willis said, "New Zealand is distinguished in that we have a very balanced and complementary trade relationship with the United States.” Willis further stated that she hopes to maintain a warm relationship with the US in the future. Investors will closely watch the developments surrounding new tariff policies. Any signs of escalating trade war tensions could drag the Kiwi lower against the USD.

Furthermore, the rising expectation that the Reserve Bank of New Zealand (RBNZ) will deliver a third consecutive supersized rate cut later this month contributes to the NZD’s downside. The markets have priced in nearly a 92% odds that the RBNZ will deliver a 50 basis points (bps) rate reduction on February 19.

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

Lallalit Srijandorn

FXStreet

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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