New Zealand Dollar gives away gains as Iran’s war offsets RBNZ’s hawkishness
- NZD/USD retreats to the lower range of the 0.5800s after hitting seven-week highs at 0.5874.
- Concerns about the escalation of the war in Iran have soured market sentiment, hurting the risk-sensitive Kiwi,
- Analysts at Brown Brothers Harriman affirm that the hawkish RBNZ stance is underpinning the NZD.
The New Zealand Dollar (NZD) is trading lower against the US Dollar (USD) for the second consecutive day on Wednesday, as the US-Iran conflict overshadows the Reserve Bank of New Zealand’s (RBNZ) hawkish monetary policy stance. The NZD/USD pair trades at 0.5818 at the time of writing, after pulling back from 0.5874 highs on Tuesday, although it remains about 3.3% above late-June lows.
Traders are cutting back NZD longs amid the sour market sentiment, as the conflict in Iran threatens to escalate out of control. The US pounded targets in Iran for the 11th consecutive day, and US President Donald Trump flagged attacks on Pickaxe Mountain, an area believed to be connected with Iran’s nuclear facilities.
Meanwhile, Reuters reported that three Saudi Arabian vessels turned around in the Red Sea after the “maritime embargo” announced by the Iran-backed Houthis on Tuesday. This has boosted concerns about disruptions in Crude supply, pushing Oil prices higher and increasing risk-aversion.
RBNZ tightening bias underpins Kiwi
Kiwi's downside attempts, however, have been limited so far, as hopes of further RBNZ monetary tightening are underpinning the pair. Strategists at Brown Brothers Harriman note that NZD/USD has “rallied to near a seven-week high” despite a “mixed” New Zealand Q2 CPI print, with headline inflation rising more than expected in Q2 but "marginally lower than the RBNZ projected in May.”
BBH analysts are convinced that “above target inflation and a more favorable domestic growth outlook argue for additional RBNZ rate hikes, which is NZD supportive.” At its last July 8 meeting, the RBNZ “raised the Official Cash Rate (OCR) 25bps to 2.50% and indicated that ‘further OCR increases appear likely at upcoming meetings,’” reinforcing the constructive backdrop for the Kiwi.
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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