AUD/NZD eases from 1.1590, after hitting fresh 12-year highs

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The Aussie Dollar has rallied well beyond 2% against its New Zealand counterpart over the last two weeks, reaching 12-year highs near 1.1600. RBA-RBNZ monetary policy divergence and weak New Zealand macroeconomic figures are crushing investors’ confidence in the New Zealand Dollar.

The Aussie Dollar surged nearly 2.5% against a weaker Kiwi over the last two weeks.
RBA-RBNZ monetary policy divergence is bleeding the Kiwi.
Steady New Zealand's inflation figures are paving the path for further RBNZ easing.

The Reserve Bank of New Zealand rattled markets last month with a Jumbo (50 basis point) rate cut, and is expected to lower interest rates further in the coming months, in an attempt to support an ailing economic growth. New Zealand’s Gross Domestic Product (GDP) shrank at a 0.9% pace in the second quarter and has contracted in three of the last five quarters.

Data released earlier on Tuesday revealed that the RBNZ Inflation expectations for the last quarter of the year remain anchored at a 2.28% yearly pace, which provides some leeway for the central bank for further monetary easing.

The RBA, on the other hand, is showing a more hawkishly tilted monetary policy stance, thus creating an AUD-supportive policy divergence. The bank kept its benchmark interest rate unchanged at 3.6% last week and warned about upside risks to inflation, which curbed hopes of any further rate cut in the near term.

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.