NZD/USD remains weak near 0.6150, with all eyes on RBNZ rate decision
NZD/USD trades on a softer note around 0.6165 in Monday’s Asian session. Traders pull back expectations for a 50 bps cut from the Fed at its November meeting after the upbeat NFP data. The RBNZ is expected to cut another OCR in its October meeting on Wednesday.The NZD/USD pair remains on the defensive near 0.6165 during the early Asian session on Monday. The firmer Greenback after the encouraging US employment data exerts some selling pressure on the pair. The Reserve Bank of New Zealand (RBNZ) interest decision will take center stage on Wednesday.
The recent US economic data indicated strength in labor conditions and will likely support the case for the US Federal Reserve's (Fed) rate cuts by 25 basis points (bps) in November and December. Traders are now pricing in around 97.4% possibility of 25 bps Fed rate cuts in September, up from 31.1% before the NFP data, according to the CME Fedwatch Tool. Lower bets of an aggressive Fed rate cut boost the US Dollar (USD) against the Kiwi.
Chicago Fed President Austan Goolsbee emphasized on Friday that the September jobs report doesn't alter the view that interest rates can come down "a lot" over the next year and a half. Goolsbee further stated that the central bank will be careful not to keep rates as "restrictive as they are," even with inflation close to the 2% target and the labor market healthy.
The RBNZ started the easing cycle in August with a 25 basis points (bps) cut to 5.25%, and analysts expect the New Zealand central bank to cut further the Official Cash Rate (OCR) in its October meeting on Wednesday. “We now expect more aggressive rate cuts from the RBNZ with growth under pressure. We see two 50bps cuts in Q4-2024, taking the OCR to 4.25% (4.75% prior) by end-2024. We maintain our view for 125bps of cuts in 2025, and see the OCR at 3% by end-2025 (3.5% prior),” noted Standard Chartered analysts.
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.
How does the Reserve Bank of New Zealand’s monetary policy influence the New Zealand Dollar?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.
Why does the Reserve Bank of New Zealand care about employment?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.
What is Quantitative Easing (QE)?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.
