NZD/USD recovers half of RBNZ policy-related losses, outlook remains weak

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NZD/USD recovers half of RBNZ policy-related losses, outlook remains weak

NZD/USD recovers some of its early losses driven by RBNZ’s surprise 50 bps interest rate cut announcement.
The RBNZ has kept the door open for further monetary policy easing.
Global political developments have increased the safe-haven demand of the US Dollar.

The NZD/USD pair claws back half of its early losses and rebounds to near 0.5775 during the late European trading session on Wednesday. Still, the Kiwi pair is down 0.4%.

The pair faced selling pressure after the monetary policy announcement by the Reserve Bank of New Zealand (RBNZ) in which it surprisingly reduced its Official Cash Rate (OCR) by 50 basis points (bps) to 2.5%. Economists also anticipated an interest rate cut from the RBNZ, but at a regular pace of 25 bps.

RBNZ members said in the monetary policy statement that the door of further monetary policy easing remains open, citing downside risks to inflation and economic activity.

Higher-than-expected interest rate cuts by the RBNZ had boded poorly for the New Zealand Dollar (NZD).

Meanwhile, sheer strength in the US Dollar (USD) is also weighing on the Kiwi pair. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, revisits the two-month high near 99.00.

The US Dollar performs strongly as its safe-haven demand has increased amid political developments in Japan and France.

Going forward, ongoing United States (US) government shutdown is expected to limit the US Dollar’s upside. On Tuesday, US President Donald Trump threatened that the White House would cut spending programs as the government enters its second week of shutdown. Trump also stated that he will provide details about lay-offs in federal agencies in next four or five days.

Economic Indicator

RBNZ Interest Rate Decision

The Reserve Bank of New Zealand (RBNZ) announces its interest rate decision after each of its seven scheduled annual policy meetings. If the RBNZ is hawkish and sees inflationary pressures rising, it raises the Official Cash Rate (OCR) to bring inflation down. This is positive for the New Zealand Dollar (NZD) since higher interest rates attract more capital inflows. Likewise, if it reaches the view that inflation is too low it lowers the OCR, which tends to weaken NZD.

Why it matters to traders?

The Reserve Bank of New Zealand (RBNZ) holds monetary policy meetings seven times a year, announcing their decision on interest rates and the economic assessments that influenced their decision. The central bank offers clues on the economic outlook and future policy path, which are of high relevance for the NZD valuation. Positive economic developments and upbeat outlook could lead the RBNZ to tighten the policy by hiking interest rates, which tends to be NZD bullish. The policy announcements are usually followed by interim Governor Christian Hawkesby's press conference.