The NZD/USD pair rebounds to around 0.5965 on Monday during the Asian trading hours. The pair edges higher after an uptick in the Reserve Bank of New Zealand’s (RBNZ) inflation expectations. However, the renewed Greenback demand due to the return of Donald Trump to the White House might drag NZD/USD lower. The attention will shift to the US October Consumer Price Index (CPI), which is due on Wednesday.
New Zealand’s two-year inflation expectations, seen as the time frame when RBNZ policy action will filter through to prices, increased slightly to 2.12% in Q4 from 2.03% recorded in Q3, according to the Reserve Bank of New Zealand’s (RBNZ) latest monetary conditions survey on Monday. Meanwhile, the NZ average one-year inflation expectations dropped to 2.05% in Q4 versus 2.40% prior. The New Zealand Dollar (NZD) attracts some buyers in the immediate reaction to the uptick in inflation expectations.
Nonetheless, analysts expect the US Dollar (USD) to continue its rally against its rivals as Trump’s plans might raise inflationary pressures and would lower the chances of sustained US Federal Reserve (Fed) rate cuts next year. "A Trump administration likely means more spending, a hotter economy, and high bars for international trade—all things that spell strength for the dollar," noted Helen Given, associate director of trading at Monex USA.
Additionally, the stronger US economic data continue to underpin the USD. The US consumer sentiment reached a seven-month peak in early November, as the University of Michigan’s Consumer Sentiment Index jumped to 73.0 from 70.5 in October. This figure beat the estimation of 71.0 and registered the highest reading since April.
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.