New Zealand Dollar tests two-month lows below 0.5765 amid Fed hiking bets
- NZD/USD extends losses on Tuesday to test two-month lows at 0.5765.
- Fed hiking bets, risk aversion and weak data from China are keeping the Kiwi under pressure.
- BBH experts affirm that the dovish RBNZ interest rate projections are likely to weigh on the NZD.
The New Zealand Dollar (NZD) keeps heading lower against the US Dollar (USD) on Tuesday, with NZD/USD bears pushing against two-month lows at 0.5765 after dropping beyond 2.5% so far in September. A mix of risk aversion amid the Middle East war and global bond market turmoil, and rising bets on US Federal Reserve (Fed) rate hikes has been bleeding the New Zealand Dollar over the last two weeks.
Investors’ focus on Tuesday is on the US Retail Sales release for August, although the final data is unlikely to trigger significant USD volatility, as it will not alter the view that the Fed is set to hike interest rates by a quarter point on Wednesday and probably another quarter point in December.
Strong Nonfarm Payrolls (NFP) data released earlier in September and the hot inflationary figures seen on Friday have prompted futures markets to price a 92% chance of a monetary tightening move by the Fed this week, up from 60% last week, according to figures by the CME’s FedWatch Tool.
China's consumption data disappoints
Apart from that, macroeconomic figures from China, New Zealand’s main trading partner, have added to evidence of a patchy economic recovery. Industrial Production beat expectations with a 5.2% growth in August, up from 4.5% in July. Retail Sales, on the other hand, slowed down to 0.4% from 0.6% in July, against expectations of an improvement to 0.8%, highlighting that domestic demand remains sluggish.
Strategists at Brown Brothers Harriman note that the Reserve Bank of New Zealand “projects the policy rate (currently, 2.75%) to peak at around 3.25% in 2028, which would still leave it below the top end of its nominal neutral range estimate between 2.3% and 4.1%.”
“The swaps curve implies a policy rate at 4.25% in the next two years,” says BBH in a note, cautioning that this “gap leaves ample room for a dovish repricing which is a drag on NZD” as markets may need to adjust expectations towards the central bank’s more modest tightening path.
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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