The New Zealand Dollar is trading slightly higher on Thursday following the release of the Reserve Bank of New Zealand’s (RBNZ) interest rate and monetary policy decisions. On Wednesday, increased demand for risky assets and positive comments from President Trump helped generate the upside momentum that drove the Kiwi to its highest level since August 1.
Demand for risk rose and the U.S. Dollar plunged after the U.S. mid-term elections resulted in the Democrats winning the House of Representatives and the Republicans retaining the Senate. Forex traders said that the as-expected results were positive for risk and negative for the greenback.
At 0450 GMT, the NZD/USD is trading .6784, up 0.0001 or +0.01%.
On Wednesday, the surge in the Kiwi was initially fueled by a report that showed New Zealand’s unemployment rate fell to the lowest level in 10 years in the quarter ending September 30. The strength in the job market probably takes a potential rate cut by the RBNZ off the table at least in the short-term.
The unemployment rate came in at 3.9%, well below the 4.4% estimate. The previous report was also revised lower to 4.4%. The Employment Change showed a 1.1% increase, besting the 0.5% forecast. The previous quarter was revised higher to 0.6%. According to Statistics New Zealand, the unemployment rate was the lowest since the June quarter of 2008 when it was 3.8 percent.
Early Thursday, the RBNZ kept its official cash rate at 1.75 percent as widely expected. Reserve Bank governor Adrian Orr said the central bank still expects to keep it at this level into 2020, despite emerging signs of inflation and an improving economic picture. The statement dropped a reference to the next move being up or down although in a subsequent press conference, he said that a rate cut was still possible.
“I think it would be pointless to do that, to remove an option. What we are saying is we are very data dependent, data-driven around how our projections unfold. The risks to the downside remain,” he said.
The direction of the NZD/USD on Thursday is likely to be determined by demand for risk, U.S. Treasury yields and the U.S. Dollar. The catalyst driving the price action will be the U.S. Federal Reserve’s interest rate and monetary policy decisions.
The Federal Open Market Committee is expected to leave interest rates unchanged. No major adjustments are expected from the meeting. However, the central bank is expected to maintain its hawkish tone in its statement, signaling a December rate hike.
Additionally, the FOMC may decide to tweak its policy by announcing it will move to increase the rate paid by the Fed for excess reserves. This is to encourage member banks to pull money out of the system, which is another form of tightening.
Any hawkish surprises by the Fed will likely put a cap on the NZD/USD rally and could encourage profit-taking and fresh shorting.
This article was originally posted on FX Empire