New Zealand Dollar steadies around 0.5550 as US Dollar bulls take a break
- NZD/USD flatlines around 0.5550 as the reversal from the 0.5650 area loses steam.
- The US Dollar takes a break as investors discount a quarter-point Fed rate hike in October.
- Growing Fed-RBNZ monetary policy divergence is likely to keep Kiwi rallies limited.
The New Zealand Dollar (NZD) is trading practically flat against the US Dollar (USD) on Thursday, holding losses after the last two days’ reversal. The NZD/USD pair is looking for direction at the lower range of the last four weeks’ trading band, with the year-to-date low of 0.5527at a short distance, after another rejection at the 0.5650 area.
The Greenback has outperformed its peers this week, boosted by hot US Consumer Price Index (CPI) figures on Tuesday, which heightened hopes that the Federal Reserve (Fed) will hike interest rates at least by a quarter point at its December meeting.
Fed officials have endorsed that view and are likely to reiterate the hawkish stance later on Thursday. A string of policymakers from the US central bank are expected to speak in public later in the day, some of whom have already expressed concern about the elevated price pressures and their support for further monetary tightening in December.
BBH: "The USD might have run too far, too fast"
Brown Brothers Harriman’s Elias Haddad, however, cautions that “the USD rally may have run too far, too fast.” He notes that “USD has overshot the level implied by rate differentials, limiting the scope for further gains in the near-term.”
Haddad also points out that market expectations for a “jumbo 50bps fed funds rate hike in December” are likely to be tempered, as they “will likely be constrained by stagnant US real wages and the resulting headwind to consumption spending,” suggesting the possibility of some USD repositioning in the coming days.
The New Zealand Dollar received some boost at the week's opening after last weekend's election provided a narrow victory to the centre-right ruling coalition, easing concerns about a period of political uncertainty. This, however, failed to alter the negative trend triggered by the Reserve Bank of New Zealand's decision to keep interest rates on hold against expectations in late October.
In that sense, lower Oil prices provide some relief for New Zealand's economy, as the country is a net Crude importer, although they also give reasons for RBNZ's doves to stand pat on rates and increase the monetary policy divergence with the Fed.
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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