NZD/USD drifts higher to around 0.6090 in Thursday’s early Asian session.
Fed officials at their September meeting agreed to cut interest rates but were unsure how aggressive to get.
The dovish outlook of the RBNZ weighs on the Kiwi.
The NZD/USD pair attracts some buyers to near 0.6090 amid the consolidation of the Greenback during the early European session on Thursday. The upside of the pair might be limited as traders might turn cautious ahead of the US Consumer Price Index (CPI) inflation data, weekly Initial Jobless Claims and Fedspeak later on Thursday.
The Minutes from September 17-18 showed a “substantial majority” of the Federal Reserve (Fed) officials support a period of looser monetary policy with a significant half-point rate cut. However, there was even a broader consensus that this initial step would not lock the US central bank into any specific pace for future rate cuts. The rising expectation of a regular 25 basis points (bps) interest rate cut by the Fed in November provides some support to the US Dollar (USD).
Inflation in the US, as measured by the CPI, is expected to see an increase of 2.3% YoY in September, down from a 2.5% rise in the previous reading. The core CPI inflation, which excludes volatile food and energy prices, is projected to stay unchanged at 3.2% YoY in the same period.
The Reserve Bank of New Zealand (RBNZ) decided to cut the Official Cash Rate (OCR) by 50 basis points (bps) from 5.25% to 4.75% at its October meeting on Wednesday, as widely expected. The Kiwi loses traction as markets bet on more aggressive easing in November. Swaps imply there are a further 45 basis points of easing to come at the RBNZ’s November 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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