NZD/USD drops closer to mid-0.6000s, its lowest level since mid-May ahead of US PCE
|- NZD/USD attracts fresh sellers on Friday amid a goodish pickup in the USD demand.
- The Fed’s hawkish outlook and rising US bond yields lift the USD to a two-month top.
- The market attention remains glued to the release of the crucial US PCE Price Index.
The NZD/USD pair comes under some renewed selling pressure following the previous day's brief pause and dives to its lowest level since mid-May during the Asian session on Friday. Spot prices currently trade just above mid-0.6000s, down 0.35% for the day, and now seem to have confirmed a bearish breakdown through the 50-day Simple Moving Average (SMA).
The US Dollar (USD) regains positive traction following Thursday's softer US data-led decline and climbs to a nearly two-month peak amid the Federal Reserve's (Fed) hawkish outlook. In fact, the recent comments by a slew of influential FOMC members suggested that the US central bank is in no rush to start its rate-cutting cycle, triggering a fresh leg up in the US Treasury bond yields. Apart from this, some repositioning trade ahead of the crucial US inflation data provides an additional boost to the buck, which turns out to be a key factor exerting downward pressure on the NZD/USD pair.
The New Zealand Dollar (NZD), on the other hand, is weighed down by expectations that the Reserve Bank of New Zealand (RBNZ) will cut rates earlier than projected. This, to a larger extent, overshadows a generally positive tone around the equity markets and fails to lend any support to the risk-sensitive Kiwi, suggesting that the path of least resistance for the NZD/USD pair is to the downside. Traders, however, might prefer to wait for the release of the US Personal Consumption Expenditures (PCE) Price Index for cues about the Fed's future policy decisions and rate-cut path.
A lower-than-expected PCE deflator or a number that is in line with market expectations will back the case for two rate cuts by the Fed this year, which, in turn, could weaken the USD. Meanwhile, any upward surprise should push back the expected timing for the first Fed cut and trigger a fresh leg up for the buck. Hence, the data will play a key role in influencing the near-term USD price dynamics and help determine the next leg of a directional move for the NZD/USD pair. Nevertheless, spot prices seem poised to register heavy weekly losses and prolong a nearly three-week-old downtrend.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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