NZD/USD hesitates below 0.5600 with RBNZ easing hopes capping gains
- The New Zealand Dollar holds losses below 0.5600 against a stronger USD.
- Hopes of an RBNZ rate cut next month are weighing on the Kiwi.
- In the US, Hawkish Fed minutes and higher job creation have curbed hopes of immediate Fed cuts.
The New Zealand Dollar remains pinned near seven-month lows at 0.5580 against the US Dollar, with upside attempts failing to hold above 0.5600. Investors' expectations that the RBNZ will cut interest rates next week, coupled with fading hopes of Fed easing in December, have created a US Dollar-supportive monetary policy divergence.
US employment data released on Thursday revealed that the economy added 119,000 jobs in September, beating expectations of a 50,000 increase, while October’s reading was revised down to a net loss of 4,000 jobs from previous estimations of a 22,000 increase.
On the negative side, the Unemployment rate increased unexpectedly to a 4-year high of 4.4% from 4.3% in August. Investors, however, kept the chances of a December rate cut at levels below 50%, down from above 60% last week and nearly 100% only a month ago.
Recent data from New Zealand have highlighted the country’s weak macroeconomic momentum, increasing pressure on the RBNZ to ease monetary policy. Producer price figures released this week revealed that inflation at factory gates moderated beyond expectations, and the central bank's inflation expectations for the fourth quarter remained unchanged within the range of price stability.
Against this backdrop, the market is practically fully pricing another interest rate cut next week, which would leave its OCR Rate at a three-year low of 2.25% down from 5.5% in August 2024.
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.