- NZD/USD remains under pressure near 0.5710 in Tuesday’s Asian session.
- RBNZ is set to lower its OCR by 50 bps to 3.75% on Wednesday.
- The escalating trade war might boost the US Dollar.
The NZD/USD pair attracts some sellers to around 0.5710 during the early Asian session on Tuesday. The rising expectation that the Reserve Bank of New Zealand (RBNZ) will deliver a jumbo-sized rate cut at the February meeting on Wednesday weighs on the New Zealand Dollar (NZD).
The RBNZ is expected to slash the Official Cash Rate (OCR) by 50 basis points (bps) on Wednesday, bringing the rate down to 3.75%. Our base case is the RBNZ will cut by 25bp at each of the following two meetings, in April and May," said ASB chief economist Nick Tuffley.
RBNZ Governor Adrian Orr will hold a press conference after the rate decision, which might offer some hints about the interest rate path in New Zealand. Any dovish remarks from the RBNZ policymakers could exert some selling pressure on the Kiwi.
The concerns of tariffs and trade war might boost the safe-haven flows, benefiting the Greenback. US President Donald Trump on Friday maintained his drumbeat of tariff threats, stating that taxes on autos will begin as soon as April 2. This was the latest action in a series of trade measures he has announced since taking office for the second term. Meanwhile, the prospect that the US Federal Reserve (Fed) would stick to its hawkish stance amid elevated inflation might act as a tailwind for the pair in the near term.
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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