NZD/USD returns above 0.6000 as post-RNBZ weakness eases
- NZD/USD returns above 0.6000 but remains below daily highs, at the 0.6050 area.
- A dovish RBNZ disappointed markets and sent the Kiwi tumbling on Wednesday.
- The focus now is on the minutes of January's Fed meeting.
The New Zealand Dollar (NZD) is trimming previous losses against the US Dollar (USD) on Wednesday, returning to levels above 0.6000 at the moment of writing, after bouncing from 0.5989 lows earlier on the day. The pair, however, remains about 0.6% down on the day, weighed by a “dovish hold” by the Reserve Bank of New Zealand (RBNZ) earlier on the day.
The RBNZ left its benchmark interest rate unchanged at 2.25%, as widely expected, but the dovish monetary policy stance delivered by the bank’s new governor, Anna Brennan, took investors by surprise and sent the Kiwi tumbling during Wednesday’s Asian and early European sessions.
Brennan observed that inflation is coming down to the RBNZ’s 1% to 3% tarrget range and that if the economy evolves as expected, “monetary policy will remain accommodative for some time”. These comments disappointed investors who were hoping for a hawkish pivot.
In the US, all eyes are on the release of the minutes of the latest Federal Reserve meeting, due later on Wednesday. The bank left rates unchanged at its January 27-28 meeting and hinted at a steady monetary policy in the coming months. Markets are likely to analyze the minutes under a different perspective, following a string of downbeat US labour releases seen last week.
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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