New Zealand Dollar holds near 0.5550 amid a pause by US Dollar bulls

NZD/USD holds near 0.5550, with the retreat from the 0.5650 zone running out of momentum.
The US Dollar pauses as investors price in a quarter-point Fed rate increase in October.
Kiwi gains are likely to remain capped as the policy gap between the Fed and RBNZ widens.

Losses persist in the New Zealand Dollar (NZD) on Thursday, although it is little changed against the US Dollar (USD) following a reversal over the past two days. After being turned back once again from the 0.5650 zone, NZD/USD is seeking direction near the bottom of its four-week trading range. The year-to-date low of 0.5527 remains close by.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Support from Tuesday’s elevated US Consumer Price Index (CPI) readings has helped the Greenback outperform other currencies this week. The figures strengthened expectations that the Federal Reserve (Fed) will raise interest rates by at least a quarter point at its December meeting.

That assessment has received backing from Fed officials, whose hawkish message is likely to be repeated later on Thursday. Several US central bank policymakers are due to make public appearances during the day. Some have already voiced concerns over persistent price pressures and backed additional monetary tightening in December.

Has the USD Rally Gone Too Far? BBH Says "The USD might have run too far, too fast"

A note of caution comes from Brown Brothers Harriman’s Elias Haddad, who warns that “the USD rally may have run too far, too fast.” In his assessment, “USD has overshot the level implied by rate differentials, limiting the scope for further gains in the near-term.”

Expectations of a “jumbo 50bps fed funds rate hike in December” are also likely to moderate, Haddad argues. Such expectations “will likely be constrained by stagnant US real wages and the resulting headwind to consumption spending,” raising the possibility of some repositioning in the USD over the coming days.

A modest lift for the New Zealand Dollar at the start of the week followed last weekend’s election, in which the centre-right ruling coalition secured a narrow victory. The result reduced concerns over a spell of political uncertainty. Even so, it did not change the downward trend set in motion by the Reserve Bank of New Zealand’s unexpected decision to leave interest rates unchanged in late October.

Cheaper oil offers some respite to New Zealand’s economy, given its status as a net crude importer. At the same time, it gives dovish RBNZ policymakers further grounds to keep rates unchanged, widening the monetary policy gap with the Fed.

RBNZ: Key Questions Answered

What role does the Reserve Bank of New Zealand play?

As New Zealand’s central bank, the Reserve Bank of New Zealand (RBNZ) has two economic objectives: securing and preserving price stability, and supporting maximum sustainable employment. Price stability is achieved when inflation, as measured by the Consumer Price Index (CPI), stays within the 1% to 3% band.

How is the New Zealand Dollar affected by the Reserve Bank of New Zealand’s monetary policy?

Guided by its objectives, the Monetary Policy Committee (MPC) of the Reserve Bank of New Zealand (RBNZ) sets the Official Cash Rate (OCR) at the level it considers appropriate. Inflation above target prompts the bank to try to rein it in by lifting the OCR. This raises borrowing costs for households and businesses, slowing economic activity. By increasing yields and making New Zealand more attractive to investors, higher interest rates generally support the New Zealand Dollar (NZD). Lower rates, in contrast, typically put downward pressure on NZD.

Why is employment a priority for the Reserve Bank of New Zealand?

A tight labour market can add to inflationary pressures, making employment a key consideration for the Reserve Bank of New Zealand (RBNZ). The bank defines “maximum sustainable employment” as the greatest utilisation of labour resources that can be maintained over time without accelerating inflation. The bank explains: “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,”

How does Quantitative Easing (QE) work?

Faced with extreme conditions, the Reserve Bank of New Zealand (RBNZ) can turn to Quantitative Easing, a monetary policy tool. Under QE, the RBNZ prints domestic currency to purchase assets, typically government or corporate bonds, from banks and other financial institutions. The purpose is to expand the domestic money supply and stimulate economic activity. A weaker New Zealand Dollar (NZD) is the usual outcome. Reserved as a last resort, QE is used when interest rate cuts alone are unlikely to meet the central bank’s objectives. The RBNZ deployed this tool during the Covid-19 pandemic.