NZD/USD declines to near 0.5980 as USD turns positive
- NZD/USD falls to near 0.5890 as the US Dollar recovers early losses and turns positive.
- Lingering US trade policy uncertainty could weigh on the US Dollar.
- The RBNZ is unlikely to hike interest rates in the near term.
The NZD/USD pair is down 0.2% to near 0.5980 during the European trading session on Thursday. The Kiwi pair is under pressure as the US Dollar (USD) turns positive ahead of the United States (US) market opening.
As of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades marginally higher to near 97.70.
Earlier in the day, the US Dollar opened lower as uncertainty surrounding the United States (US) trade policy outlook continued to linger. However, the uncertainty still persists as investors worry that Washington’s trading partners, who have signed trade deals, could compel the White House for a revision in the wake of the Supreme Court’s (SC) ruling against President Donald Trump’s tariff policy.
To mitigate the same, Washington has announced 10% global tariffs, and guidance that the import duty could be increased to 15% or above on some countries.
On the monetary policy front, Federal Reserve (Fed) officials have been guiding that the current monetary policy state is appropriate to balance job and inflation risks.
Meanwhile, the New Zealand Dollar (NZD) trades lower on diminishing expectations that the Reserve Bank of New Zealand (RBNZ) will not hike interest rates in the near term. Hawkish RBA prospects have squeezed as Governor Anna Breman said in the monetary policy announcement last week that the economy could continue to grow without triggering inflationary pressures.
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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