Below 0.5700: New Zealand Dollar loses momentum as Oil prices weigh on risk appetite

0.5700 caps NZD/USD as Friday’s modest rise leaves the pair range-bound.
Diverging RBNZ and Fed policy expectations have supported the Kiwi this week.
A steep reversal in US Treasury yields is countering the US Dollar’s support from risk aversion.

NZD/USD trades around 0.5690. The New Zealand Dollar (NZD) is slightly higher against the US Dollar (USD) on Friday, though still within Thursday’s range. Oil prices at fresh five-month highs are contributing to a moderately risk-averse mood. The pair sits just below the one-month high of 0.5710 reached earlier this week, with upward momentum weakening.

Expectations of a Reserve Bank of New Zealand (RBNZ) interest rate increase at next week’s monetary policy meeting have strengthened, putting the Kiwi among this week’s best-performing major currencies. A weaker exchange rate and the energy shock have raised the near-term inflation outlook.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Escalating Middle East tensions are lifting Oil prices and eroding risk appetite on Friday. Brent Crude climbed above $110.00 a barrel to a five-month high. Higher prices are adding to global inflation while increasing the vulnerability of Crude-importing economies, including New Zealand. This could present a serious challenge for the RBNZ.

Falling US Treasury yields constrain USD gains

Risk aversion has nevertheless provided little meaningful support for the US Dollar this week. As US Treasury yields reverse lower, investors have abandoned expectations of a Federal Reserve (Fed) interest rate increase next week and are assessing the potential extent of the tightening cycle. The Greenback has consequently remained under pressure.

Mounting doubts over AI sector profitability have driven investors back towards the safety of US Government bonds. The resulting sharp fall in long-term US bond yields this week has reduced pressure on the central bank to raise interest rates.

Later on Friday, the preliminary US S&P Global Purchasing Managers' Index (PMI) readings will provide an indication of business activity strength. Their effect on the US Dollar is expected to be limited, however, as the figures will not alter the outlook for the Fed’s next monetary policy meeting.

RBNZ: Key Questions Answered

The Reserve Bank of New Zealand’s Role

As New Zealand’s central bank, the Reserve Bank of New Zealand (RBNZ) has economic objectives covering price stability and maximum sustainable employment. Achieving and maintaining price stability means keeping inflation, as measured by the Consumer Price Index (CPI), within a band of 1% to 3%. The bank also seeks to support maximum sustainable employment.

RBNZ Monetary Policy and the New Zealand Dollar

Responsibility for setting the Official Cash Rate (OCR) rests with the Reserve Bank of New Zealand’s (RBNZ) Monetary Policy Committee (MPC), which determines the appropriate rate in line with its objectives. Above-target inflation prompts the bank to try to curb price pressures by increasing the OCR. This raises borrowing costs for households and businesses, slowing economic activity. By lifting yields and making New Zealand more attractive to investors, higher interest rates generally support the New Zealand Dollar (NZD). Lower rates, by contrast, typically weaken NZD.

Employment’s Importance to the RBNZ

A tight labour market can intensify inflation, making employment a key consideration for the Reserve Bank of New Zealand (RBNZ). The bank defines its goal of “maximum sustainable employment” as the greatest use of labour resources that can be maintained over time without accelerating inflation. The bank explains: “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,”

Quantitative Easing (QE) Explained

When interest rate cuts alone are unlikely to meet its objectives, the Reserve Bank of New Zealand (RBNZ) can turn to Quantitative Easing as a last resort in extreme circumstances. Under QE, the RBNZ creates local currency to purchase assets, typically government or corporate bonds, from banks and other financial institutions. The aim is to expand the domestic money supply and stimulate economic activity. This policy usually weakens the New Zealand Dollar (NZD). The RBNZ deployed QE during the Covid-19 pandemic.