New Zealand Dollar stalls below 0.5700 as Oil prices dent risk appetite
- NZD/USD ticks up on Friday but remains range-bound, capped below 0.5700 so far.
- RBNZ-Fed monetary policy divergence has boosted the Kiwi this week.
- A sharp reversal on US Treasury yields is offsetting the positive impact of risk aversion in the US Dollar.
The New Zealand Dollar (NZD) posts minor gains against the US Dollar (USD) on Friday, but remains trading within Thursday’s range, amid a moderate risk-off mood as Oil prices rise to fresh five-month highs. The NZD/USD is trading at the 0.5690 area, just below one-month highs at 0.5710 hit earlier this week, yet with bullish momentum fading.
The Kiwi has been one of the strongest performers among major currencies this week, fuelled by rising expectations that the Reserve Bank of New Zealand (RBNZ) will hike interest rates at next week’s monetary policy meeting, as the lower exchange rate and the energy shock have boosted the nearñterm inflationary outlook.
Risk appetite, however, is faltering on Friday, as tensions climb in the Middle East, pushing Oil prices higher. The barrel of Brent Crude hit five-month highs above $110.00 on Friday, pushing global inflation higher, but also increasing the exposure of Crude-importing economies such as New Zealand’s, which might pose a serious challenge for the RBNZ.
The decline in US Treasury yields is weighing on USD rallies
Thart said the US Dollar has failed to draw any significant support from risk aversion this week. The Greenback has remained on its back foot with investors ditching hopes of a Federal Reserve (Fed) interest rate hike next week, and pondering the overall scope of the tightening cycle, amid the recent reversal on US Treasury yields.
Yields on US long-term bonds have dropped sharply this week as growing concerns about the profitability of the AI sector have prompted investors to return to the safety of US Government bonds, easing pressure on the central bank to hike interest rates.
In the calendar, later on Friday, preliminary US S&P Global Purchasing Managers' Index (PMI) figures will show the strength of business activity, although the impact on the US Dollar is likely to be limited, as it will not change the outlook for the Fed's next monetary policy meeting.
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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