Investors in the currency market are wondering who and how quickly will start raising interest rates. As a rule and in theory, it tends to be the case that the sooner increases are introduced and continued, the sooner the country's currency could gain value. After today's announcement from the Reserve Bank of New Zealand or RBNZ, investors saw that this was where the chance of a rate hike for the currency could be.
As a result, the New Zealand dollar (NZD) appears to be leading the gains today. And it is up more than 1 percent against the USD this morning. What has the central bank done to encourage investors to buy the New Zealand dollar?
The first step before the hike?
Well, the RBNZ decided to end additional asset purchases under the Large Scale Asset Purchase program until July 23. This marks the end of the ongoing QE program, or so-called quantitative easing, which was seen as the first step made before a possible interest rate hike, which may take place later this year. The RBNZ simultaneously kept the cash rate at a record low of 0.25 percent.
Policymakers noted that some monetary stimulus remains necessary, but the level of stimulus could be reduced to minimize the risk of not meeting consumer price and employment targets in the medium term. The threat to New Zealand's rapid rate hike scenario, on the other hand, is the rise in new cases of Delta variant coronavirus infection in the Asia-Pacific region, which threatens to slow the economic recovery. In Sydney, Australia, the lockdown was extended for another two weeks.
Among other currencies where the market also seems to see rate hikes, the British pound and the US dollar stand out. According to the interest rate market, GBP interest rates could rise by almost 20 bps in a year, while USD interest rates could rise by almost 10 bps.
Events of the day with potential impact on the USD
Yesterday, inflation data from the US surprised, which could help the USD. In June 2021, core inflation increased by 4.5%, and CPI inflation by 5.4% vs. June 2020. This is mainly due to the increase in prices of energy commodities, transport services and used cars (price growth of 45% y/y), which might be explained today by Federal Reserve Chief Jerome Powell.
The Fed Chairman will present his semi-annual report on monetary policy to the House of Representatives Committee on Financial Services, which seems to be the key event of the day today. The speech is scheduled for 6 p.m., but transcripts of the speech and its content may be released before then, and the U.S. dollar and stock market indices may react to that.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
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