AUD/NZD slips near 1.1500 as New Zealand’s Trade Deficit YoY narrows in October

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AUD/NZD loses ground for the second successive session, trading around 1.1520 during the Asian hours on Friday.

AUD/NZD depreciates as New Zealand’s Trade Deficit narrowed to NZD 2.28 billion YoY in October from NZD 2.39 billion.
The New Zealand Dollar could struggle due to the increased likelihood of the RBNZ rate cut next week.
S&P Global Australia Manufacturing PMI rose to 51.6 in November from 49.7 prior.

AUD/NZD loses ground for the second successive session, trading around 1.1520 during the Asian hours on Friday. The currency cross depreciates as the New Zealand Dollar (NZD) receives support after the release of New Zealand’s Trade Balance data, which indicated that the Trade Deficit narrowed to NZD 2.28 billion year-over-year in October from NZD 2.39 billion. Exports rose 16% to NZD 6.5 billion, while Imports rose 11% to NZD 8.0 billion.

However, the downside of the AUD/NZD cross could be restrained as the New Zealand Dollar (NZD) could face challenges due to the prevailing sentiment that the Reserve Bank of New Zealand (RBNZ) will deliver a rate cut next week. After a surprise cut by 50 basis points (bps) last month, the New Zealand central bank is expected to reduce its Official Cash Rate (OCR) by 25 bps to 2.25% at its November meeting next week.

The Australian Dollar (AUD) receives support as Australia's preliminary S&P Global Manufacturing Purchasing Managers Index (PMI) climbed to 51.6 in November, from 49.7 prior. Meanwhile, Services PMI rose to 52.7 in November from the previous reading of 52.5, while the Composite PMI increased to 52.6 in November versus 52.1 prior.

The AUD also finds support as expectations grow for a cautious stance from the Reserve Bank of Australia (RBA). Minutes from the RBA’s November meeting indicated the central bank may keep rates unchanged for an extended period if economic data continues to outperform.

RBNZ FAQs

What is the Reserve Bank of New Zealand?

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.