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Kiwi tests resistance as Fed amends monetary policy

NZD - New Zealand Dollar

Much likes its antipodean counterpart, the New Zealand dollar offered little to excite investors through the domestic session on Thursday, bouncing between 0.6620 and 0.6640 ahead of commentary from US Fed President Jerome Powell. Powell addressed virtual attendees of this years Jackson Hole symposium on economic policy and confirmed the Fed will adjust its monetary policy program and inflation management system moving forward. The announcement was widely expected and immediately sent the NZD through resistance to intraday highs at 0.6670, before correcting lower into this morning’s open. Powell announced the Fed will move away from a fixed inflation target to an average of 2%, allowing the bank to offset periods of higher inflation with periods of lower inflation and delay increases in interest rates to combat price increases. While negative for the US dollar in the long run, the worlds base currency enjoyed short term support after the initial knee jerk response as proactive policy setting designed to drive economic activity and underpin employment continues to find support. With resistance on moves above 0.6650 intact, we expect the Kiwi will continue to track sideways into the weekly close.

Key Movers

The US dollar edged higher this morning despite confirmation from the US Federal Reserve it will amend its inflation management system, effectively keeping interest rates lower for longer. Having moved away from a fixed inflation target, the Fed has greater scope to absorb periods of higher inflation, offsetting increases in prices against periods of lower inflation. The move would normally be a negative for the dollar and while the initial response saw the world base currency sink sharply, investors made an abrupt about face turn and chased the dollar higher. Positive, proactive policy setting designed to drive activity and underpin employment continues to find value in the current market, as investors seek assurances governments and central banks will do whatever it takes to guide the global economy through the COVID-19 crisis. The dollar index closed 0.2% higher on the day breaking back through 93.

Despite the short term support we expect the policy change will act as a drag on the US dollar. If the Fed is able to absorb price pressures and leave rates on hold near zero for longer, a greater disparity in yields will emerge as other central banks begin to show signs of tightening policy.

Expected Ranges

NZD/USD: 0.6550 - 0.6690 ▲

NZD/EUR: 0.5580 - 0.5650 ▲

GBP/NZD: 1.9720 - 2.0180 ▼

NZD/AUD: 0.9050 - 0.9190 ▲

NZD/CAD: 0.8620 - 0.8750 ▼