NZD/USD ticks down from monthly highs but remains above 0.5700

The NZD eases from 0.5730 highs against the US Dollar but remains above 0.5700.
The pair is set to a nearly 1.7% weekly gain in the strongest weekly performance since May.
RBNZ-Fed monetary policy divergence is likely to boost the Kiwi's recovery.

Guillermo Alcala FXStreet

The New Zealand Dollar shows minor losses on Friday, with the pair pulling back from four-week highs at 0.5730, although it remains steady above 0.5700, on track for a 1.7% weekly rally, after its strongest week since May.

The Kiwi Dollar is trimming some gains, as the US Dollar bounces up from lows, but maintains its immediate bullish tone intact. The positive divergence between the US Federal Reserve (Fed) and the Reserve Bank of New Zealand’s (RBNZ) monetary policy expectations is underpinning suppoprt for the Kiwi Dollar.

RBNZ's "hawkish cut" has boosted the NZD

Investors welcomed the “hawkish cut” by the RBNZ on Wednesday. The bank cut its OCR rate by 0.25% to a three-year low of 2.25% as widely expected, but the bank's statement conditioned further monetary policy adjustments to medium-term inflation trends, signalling the end of the easing cycle.

This stance contrasts with the increasing hopes that the Fed will ease its monetary policy at its December 10 meeting. Dovish comments by some Fed officials and the soft US Retail Sales data released earlier in the week have boosted chances of a Fed rate cut next month to 85%, from less than 40% one month ago, according to the CME Group’s Fed Watch Tool.

Furthermore, rumours that the White House’s National Economic Council (NEC) Director Kevin Hassett emerges as the favourite candidate to replace Fed chair Jerome Powell in May, are feeding hopes of further interest rate cuts through 2026. Unless the fundamental backdrop changes radically, US Dollar rallies are likely to remain limited.

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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