New Zealand Dollar faces some selling pressure as RBNZ cuts interest rate by 50 bps
|- The New Zealand Dollar edges lower in Wednesday’s early European session.
- RBNZ cut the interest rate by 50 bps to 4.75% as anticipated.
- The September FOMC Minutes will be in the spotlight on Wednesday.
The New Zealand Dollar (NZD) loses momentum to near the lowest level since mid-August on Wednesday. The Reserve Bank of New Zealand (RBNZ) decided to cut the Official Cash Rate (OCR) by 50 basis points (bps) from 5.25% to 4.75% at its October meeting, as widely expected. The Kiwi attracts some sellers in an immediate reaction to the interest rate decision. Additionally, Chinese officials disappoint traders without more major stimulus. This, in turn, drags the proxy-China NZD lower against the Greenback as China is a major trading partner to New Zealand.
Moving on, traders will keep an eye on the Federal Open Market Committee (FOMC) Minutes later on Wednesday. On Thursday, the attention will shift to the US Consumer Price Index (CPI) data for September. In case the report shows a softer-than-expected outcome, this could weigh on the USD and help limit the pair’s losses.
Daily Digest Market Movers: New Zealand Dollar remains weak after RBNZ interest rate decision
- According to the RBNZ Monetary Policy Statement (MPS), the committee assesses that annual consumer price inflation is within its 1 to 3% inflation target range.
- The Committee agreed that it is appropriate to cut the OCR by 50 basis points to achieve and maintain low and stable inflation while seeking to avoid unnecessary instability in output, employment, interest rates, and the exchange rate, noted the RBNZ MPS.
- Federal Reserve (Fed) Vice Chair Philip Jefferson said on Tuesday the US central bank's 50 basis points (bps) interest rate cut in September was aimed at keeping the labor market strong even as inflation continues to ease, per Reuters.
- Atlanta Fed President Raphael Bostic stated on Tuesday that the jobs market is not showing signs of weakness, adding that despite significant progress on inflation, overall price figures have not yet hit target levels.
- New York Fed president John Williams said he strongly supported a rate cut by 50 basis points (bps) last meeting and that the two additional 25 bps reduction this year is a “pretty reasonable representation of a base case,” per Reuters.
Technical Analysis: New Zealand Dollar resumes downside bias
The New Zealand Dollar weakens on the day. The NZD/USD pair continues its downtrend as it crosses below the key 100-day Exponential Moving Average (EMA) and is poised to break below the ascending trend channel on the daily chart. The downward momentum is supported by the 14-day Relative Strength Index (RSI), which stands below the midline near 41.10, supporting the sellers in the near term.
A decisive break below the lower limit of the trend channel of 0.6135 could pave the way to the 0.6000 psychological level. Sustained trading below this level could lead to a drop towards 0.5974, the low of August 15.
On the upside, the 100-day EMA at 0.6142 acts as an immediate resistance level for the pair. Extended gains will see a rally to 0.6254, the high of September 6. The additional upside filter to watch is 0.6300, a round figure, en route to 0.6365, the upper boundary of the trend channel.
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
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