NZD/USD approaches highs above 0.5840 amid a positive risk mood
- The New Zealand Dollar approaches last week's highs above 0.5840 after bouncing from 0.5810.
- A moderately positive mood is buoying the Kiwi in Monday's early European session.
- The RBNZ is expected to deliver a "dovish cut" on Wednesday that might hurt the NZD's recovery.
Investors’ sentiment has brightened, and risk-sensitive currencies, like the New Zealand Dollar, are outperforming their peers at the week's opening. The NZD/USD has bounced from 0.5810 lows earlier on the day and is drawing closer to last week’s highs, at the 0.5840 area.
The positive risk sentiment is offsetting market expectations that the Reserve Bank of New Zealand will cut its Official Cash Rate (OCR) to a 3-year low below the current 3% after their monetary policy meeting on Wednesday.
A dovish RBNZ might snap the Kiwi's recovery
Markets are split on the possibility of a 25 or a 50 basis points rate cut. Anyway, the bank’s statement is likely to be tilted to the dovish side, laying the ground for further monetary easing amid the global trade uncertainty, which might add pressure on the NZD.
The US Dollar, on the other side, remains weighed by the ongoing standoff between US Senate Democratic and Republican leaders, which is leading the US shutdown into its second week, threatening to be a protracted one.
In the absence of government data releases, the main driver for the US Dollar is the comments from Fed officials, who remain deeply divided about the forward guidance. In this context, the minutes of the last Fed meeting are likely to shed some light on the bank’s near-term policy, although the market remains convinced that a rate cut in October is a done deal, and another one in December is highly likely. This sentiment is keeping US Dollar rallies limited.
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.
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