NZD/USD stands tall near 0.5740 highs despite a mild risk-averse mood
- The New Zealand Dollar remains close to the monthly highs, at 0.5744.
- RBNZ-Fed monetary policy divergence is underpinning the Kiwi.
- The US ISM Manufacturing PMI is expected to show further contraction in November.
The New Zealand Dollar defies the risk-off market, and the downbeat Chinese Manufacturing PMI seen earlier on Monday, and maintains its bid tone intact, trading at 0.5735 at the time of writing, with the 0.5744 monthly high, at a short distance.
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Chinese factory activity, as measured by the RantingDog Manufacturing Purchasing Managers’ Index (PMI), fell to contraction levels, at 49.9 in November, against market expectations of a minor slowdown to 50.5 from October’s 50.6 level. China is New Zealand’s major trading partner, and weak data from the Asian country tends to add negative pressure on the Kiwi.
RBNZ-Fed monetary policy divergence
The New Zealand Dollar, however, has opened the week in a moderately positive tone following a 2.14% rally in the previous week. A “hawkish cut” by the RBNZ, which signalled the end of the easing cycle, sent the pair surging last week.
The US Dollar, on the contrary, remains on the defensive, as investors reassess the chances of a Federal Reserve (Fed) rate cut next week, amid the soft macroeconomic data released after the reopening of the US federal government.
Later today, a positive surprise in November’s US ISM Manufacturing PMI figures might provide some support to the US Dollar, but upside attempts are likely to remain limited. The CME Fed Watch Tool shows an 85% chance of a 0.25% rate cut after the December 10 meeting and two or three more cuts in 2026.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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