NZD/USD trims a part of NZ CPI-led gains, holds above mid-0.6000s amid subdued USD demand
- NZD/USD gains strong positive traction following the release of the NZ CPI on Wednesday.
- The risk-on mood and subdued USD price action provide an additional boost to the major.
- Bets for early RBNZ rate cuts and China’s economic woes keep a lid on any meaningful gains.
The NZD/USD pair stages a solid recovery from over a two-month low touched during the Asian session on Wednesday, albeit it lacks follow-through buying and remains below the 0.6100 round figure. Nevertheless, spot prices, for now, seem to have snapped a two-day losing streak and currently trade around the 0.6065 area, still up over 0.30% for the day.
Despite the softer-than-expected Consumer Price Index (CPI) released from New Zealand earlier today, non-tradable inflation pointed to persistent domestic pricing pressures and offered some support to the New Zealand Dollar (NZD). Apart from this, the upbeat market mood, which tends to benefit the risk-sensitive Kiwi, prompts some intraday short-covering move around the NZD/USD pair.
The US Dollar (USD), on the other hand, is undermined by expectations that the Federal Reserve (Fed) will start cutting interest rates in September. This, to a larger extent, overshadowed the better-than-expected US Retail Sales figures released on Tuesday and keeps the US Treasury bond yields depressed near a multi-month low, which undermines the buck and lends support to the NZD/USD pair.
Meanwhile, market participants brought forward the likely timing of interest rate cut by the Reserve Bank of New Zealand (RBNZ) in reaction to the weaker CPI report. Apart from this, China's economic woes, which tend to dent demand for antipodean currencies, including the Kiwi, further contribute to capping the upside for the NZD/USD pair and warrants some caution for bullish traders.
RBNZ FAQs
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.
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.
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.
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
Haresh Menghani
FXStreet
Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.
