The New Zealand Dollar (NZD) is trading higher against the US Dollar (USD) on Monday. Optimism surrounding the outlook for China, New Zealand’s chief trading partner, supports the NZD – and the USD suffers more losses. Chinese government officials said on Monday that they had planned to backstop the faltering real estate sector.
The NZD/USD pair has risen 50 pips in Monday’s session at 21:00 GMT, changing hands at 0.6036 – up 0.81%.
NZD/USD – the number of US Dollars one New Zealand Dollar can buy – continues its rebound on Monday, peaking close to the key October highs at (0.6050 – 0.6055).
New Zealand Dollar vs US Dollar: Daily Chart
The pair remains in a short-term bullish trend, biasing longs; this holds true as long as the November 14 lows at 0.5863 stay intact.
The zone around the October highs has been touched multiple times this year, making it an important support and resistance level. As a result of its heightened significance, it is likely to yield a volatile push higher when it is eventually broken.
A decisive break above 0.6055 would change the outlook to bullish in the medium term, indicating the possibility of the birth of a new uptrend. Such a move would then initially target the 200-day Simple Moving Average (SMA) at around 0.6100.
A possible bullish inverse head and shoulders pattern may have formed at the lows. The pattern is identified by the labels applied to the chart above. L and R stand for the left and right shoulders, whilst H stands for the head. If the neckline at the October highs is decisively breached, it will indicate a substantial move to the upside, to a target at 0.6215.
A decisive break would be one accompanied by a long green candle or three green candles in a row.
As things stand, the medium and long-term trends are both still bearish, however, suggesting the potential for more downside remains strong.
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.