NZD/USD rallies further to test 0.6030 high on risk appetite
- The New Zealand Dollar tests YTD highs at 0.6030, fuelled by the risk-on mood.
- Trump’s pause on 50% tariffs on the EU has boosted appetite for risk.
- The US Dollar keeps bleeding on concerns about US fiscal recklessness.
US President Trump’s decision to temporarily suspend 50% tariffs on EU products is boosting investors’ appetite for risk on Monday. This is fuelling the risk-sensitive New Zealand Dollar, which has rallied to retest the Year-to-Date highs at 0.6030.
Trump backed off on his plan to impose 50% tariffs on all EU products, and the market has breathed a sigh of relief, wary that a trade rift between the US and Europe would pose a significant impact on global economic growth.
The RBNZ is expected to cut rates on Wednesday
This news has diverted investors’ focus from the upcoming Reserve Bank of New Zealand’s monetary policy meeting, due on Wednesday. The market consensus anticipates a 25 basis point rate cut to 3.25%.
Beyond that, the bank statement is likely to lean on the dovish side, suggesting further monetary easing ahead, in the face of the uncertain global trade context. The New Zealand Economic Research Institute, considered the shadow monetary policy board, has confirmed this view, with most members recommending a quarter-point cut and one vowing for a 0.50% cut.
The Dollar, however, is suffering from weaknesses of its own, which keep NZD’s downside attempts limited. Moody’s downgraded the country’s debt rating last week, at the time that Trump’s sweeping tax bill passed the House of Representatives to be discussed in the US Senate.
trillion
The bill is expected to increase US debt by about $3.8 trillion in the next ten years, which has raised serious concerns about US fiscal stability, is undermining confidence in US Treasury Bonds, and the US Dollar in a “Sell America” trade.
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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