NZD/USD wobbles around 0.6050 while investors await Sino-US trade talks outcome
- NZD/USD trades well inside limited range around 0.6050 as investors look for US-China meeting minutes.
- The US inflation is expected to have grown at a faster pace in May.
- Investors seek cues about whether the RBNZ will reduce interest rates again in the July policy meeting.
The NZD/USD pair consolidates in a tight range around 0.6050 during European trading hours on Tuesday. The Kiwi pair trades sideways as investors shift sidelines with investors awaiting the outcome of trade talks between the United States (US) and China, which started on Monday in London.
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades calmly around 99.00. Meanwhile, S&P 500 futures exhibit a sluggish performance during European trading hours, indicating a cautious market mood.
Though the White House has signaled that negotiations would go smooth and Washington will get access to rare earth minerals in large quantities, investors refrain from buying the optimism while waiting for a concrete breakthrough.
This week, the US Consumer Price Index (CPI) data for May will also be the key trigger for the next move in the US Dollar, which will be published on Wednesday. The CPI report is expected to show that inflationary pressures grew at a faster pace. Such a scenario would limit the Federal Reserve (Fed) from lowering interest rates.
Meanwhile, the New Zealand Dollar (NZD) is also exhibiting a sideways performance amid US-China trade talks. The impact of the US-China trade talks outcome is expected to be significant on the Kiwi dollar, given that the New Zealand (NZ) economy relies heavily on its exports to China.
On the domestic front, investors look for cues about whether the Reserve Bank of New Zealand (RBNZ) will cut interest rates in the policy meeting next month. In the May policy meeting, the RBNZ slashed its Official Cash Rate (OCR) by 25 basis points (bps) to 3.25%.
The RBNZ guided that the monetary expansion cycle will be deeper than what they had anticipated earlier, citing global economic risks and inflation is within the bank’s target.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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