- The New Zealand Dollar is pulling back from 0.6030 amid a stronger US Dollar.
- The Greenback trims losses with fears about a US debt crisis looming.
- Market expectations of a dovish cut by the RBNZ are weighing on the Kiwi.
The New Zealand Dollar failed to break the Year-to-Date high at 0.6030 and is trading lower on Tuesday, weighed by a somewhat stronger US Dollar and market expectations that the RBNZ will ease its monetary policy further on Wednesday.
The Dollar Index is trading higher on Tuesday with US markets coming back from a long weekend and investors relieved by Trump’s decision to delay the deadline for a trade deal with the EU until July 9.
The US Dollar picks up with debt fears looming
The US president backed off from his threat to impose 50% levies on all EU imports, which would have slashed global growth prospects. The commercial activity of the US and the Euro Area accounts for 30% of global trade and 43% of global GDP.
Dollar’s recovery, however, night have short legs, as concerns about the ballooning US debt are looming. The US Senate will discuss a tax-slashing bill that is expected to raise the $36.2 trillion debt pile by $3.8 trillion over the next ten years. This fuelled a gradual sell-off on US assets during the previous week.
Later today, the US Durable Goods Orders and the Conference Board’s Consumer Sentiment Index will provide further insight into the impact of Trump’s tariff turmoil on the US economy. These figures are likely to set the USD direction ahead of the FOMC minutes and the key Personal Consumption Expenditures (PCE) Price Index figures, due later this week.
In New Zealand, the RBNZ is expected to cut rates by 25 basis points to 3.25% on Wednesday, and investors are bracing for a dovishly-leaning statement. The bank might point to further monetary easing, citing the potential impact of the uncertain trade scenario. This would add pressure on the Kiwi.
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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