The Monetary Policy Committee (MPC) is an internal committee of the Reserve Bank of New Zealand (RBNZ) and is responsible for formulating monetary policy in New Zealand, directed towards the economic objectives of achieving and maintaining stability in the general level of prices over the medium term and supporting maximum sustainable employment. There are many economic indicators that influence the NZD. But the RBNZ’s monetary policy decision has the biggest impact.

While release of RBNZ minutes the European session is already closed and the US session is in the final hours of trading. Thus, any big decisions from the RBNZ monetary policy meeting can move the NZD forex pairs.

In this article we will inquire Monetary Policy of RBNZ, what is mean by price stability, inflation, deflation and how monetary policy acts to control inflation in the New Zealand economy.

Price Stability

Deflation is a decrease in the general price level of goods and services over a longer period of time. Too rapid inflation is negative for many reasons: it complicates the economic decision-making process and slows economic growth. In addition, inflation diminishes the value of savings. Deflation is accompanied by the threat of a slowdown in economic growth, because the general level of prices declines and thus people postpone consumption and companies postpone investment. There may emerge an inflationary gap which is very difficult to overcome.

The Compact of Inflation

Mass unemployment is also undesirable. Hence the RBNZ is charged with the delicate task of balancing inflation and unemployment.

The Compact of Interest Rates

A higher interest rate will also typically lead to an appreciation in the exchange rate. This reduces exports as each unit of exports now earns the New Zealand producer less. So a rise in the interest rate leads to a reduction in consumption, investment and exports. As activity reduces, so does employment, wage growth and inflation. When the RBNZ seeks to stoke the economy and inflation, it reduces interest rates. It encourages consumption over savings and borrowing for investment. A lower exchange rate will also support exports. These will result in higher economic activity, employment, wage growth and inflation. In practice the linkages take varying lengths of time to influence behaviour.

Interest rate changes typically take one to two years to achieve the full impact on economic activity and inflation. So the RBNZ has to look ahead in formulating monetary policy, often based on forecasts and judgments.

How it impacts the Forex Market

Often but not always an increase in domestic interest rates will cause the exchange rate to also rise or appreciate. If interest rates are relatively higher in New Zealand than in other economies, overseas investors will be more likely to invest in New Zealand as they receive a relatively larger return for their money. However, before overseas investors can invest in New Zealand, they must exchange their foreign currency into New Zealand dollars. This increase in demand for New Zealand dollars will cause the New Zealand dollar to appreciate.

Many other factors also affect the exchange rate. One such factor will be changes in the world market for the goods and services that New Zealand exports. Also, financial market expectations of future developments can have an important influence on the exchange rate. All these factors make forecasting exchange rates movements notoriously difficult.

Trading the NZD pair

Trend following: It works during strong trends. This is possible with some non USD based NZD forex pairs.

Breakout trading: It gives rapid results and it’s a short-term trading strategy. Breakout works best with NZDUSD, especially in the early Asian trading forex session.

Scalping opportunities: Scalping the NZD is easy because of its volatile nature. You can find NZDUSD scalping opportunities at the start of the NY trading session. For EURNZD, you could focus on the European trading session.

Conclusion

News and analyzing the activities of central banks should be a high priority for forex traders. Currency exchange rates will move as banks determine the monetary policy of New Zealand. As currency exchange rates move, traders are likely to increase profits – not only by accumulating interest in carry trades but also by real fluctuations in the market. Research analysis can help a trader avoid surprising rate moves and respond correctly when they inevitably happen.