NZD/USD gathers strength above 0.5900 as investors await RBNZ rate decision
- NZD/USD strengthens to around 0.5925 in Tuesday’s early Asian session.
- Traders currently expect a rate cut at the Fed's September 16-17 meeting.
- The RBNZ is set to lower the OCR by 25 basis points to 3.0% on Wednesday.
The NZD/USD pair gains ground to near 0.5925 during the early Asian session on Tuesday. The US Dollar (USD) softens against the New Zealand Dollar (NZD) as a slew of US economic data keeps the case for a September Federal Reserve (Fed) interest rate cut intact. Traders will closely monitor the Reserve Bank of New Zealand (RBNZ) interest rate decision and the FOMC Minutes later on Wednesday.
A jump in US wholesale prices last month and a solid increase in July's Retail Sales reports dimmed the prospect of an oversized 50 basis points (bps) Fed cut. However, investors still anticipate rate reductions this year, which might undermine the Greenback and act as a tailwind for the pair.
Money markets are now pricing in nearly an 83% possibility of a 25 basis points (bps) Fed rate cut in September, according to the CME FedWatch tool. Traders will take more cues from the Jackson Hole Economic Policy Symposium, with Fed Chair Jerome Powell’s speech keenly watched for guidance on a September interest-rate cut after recent US data.
On the Kiwi front, the RBNZ is expected to cut the Official Cash Rate (OCR) at its August meeting on Wednesday, resuming its easing cycle after a pause in July as the economy shows signs of stalling. Investors will keep an eye on the fresh economic forecasts, along with the Press Conference from Governor Christian Hawkesby. The dovish remarks from the New Zealand central bank could drag the NZD lower against the USD in the near term.
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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