NZD/USD falls to near 0.6200 due to diminishing dovish mood of Fed, China’s concerns
|- NZD/USD extends losses as traders expect that the Fed will not deliver a 50 basis points rate cut in September.
- Traders await the US ISM Manufacturing PMI on Tuesday ahead of upcoming US employment data.
- New Zealand’s Terms of Trade Index rose by 2.0% QoQ in Q2, following the previous 5.1% rise.
NZD/USD continues to lose ground for the third successive session, trading around 0.6200 during the Asian hours on Tuesday. The US Dollar (USD) receives support from diminishing odds of an aggressive interest rate cut by the US Federal Reserve rate in September.
Traders await the ISM Manufacturing PMI data due later in the day. The focus will shift to upcoming US employment data, particularly the August Nonfarm Payrolls (NFP), for further insights into the potential timing and scale of Fed rate cuts.
US Treasury yields continue to rise and provide support for the US Dollar, but its gains may be limited by growing expectations of a 25 basis point rate cut by the Fed in September. According to the CME FedWatch Tool, markets are nearly 70% confident of at least a 25 basis point (bps) rate cut by the Fed at its September meeting.
In New Zealand, the Terms of Trade Index increased by 2.0% quarter-on-quarter in Q2, following the 5.1% increase in the previous quarter and matching market expectations of a 2.0% rise. Export prices saw a significant increase of 5.2% in the second quarter, recovering from a 0.3% decrease in the March quarter. Import prices also rebounded, rising by 3.1% after a sharp 5.1% drop in the prior period.
New Zealand's NZX 50 Index consolidates, hovering around 12,500, due to a lack of global drivers with Wall Street closed for Monday’s break. Traders assess July manufacturing PMI data from China, a key trading partner. Official figures indicated the sharpest contraction in factory activity in six months, while private survey readings suggested that the manufacturing sector had expanded for the seventh time this year.
(This story was corrected on September 3 at 09:20 GMT to say, in the fourth paragraph, that the Terms of Trade Index increased by 2.0% QoQ in Q2, following the 5.1% increase in the previous quarter, instead of a 2.1% increase in Q2.)
New Zealand Dollar FAQs
The New Zealand Dollar (NZD), also known as the Kiwi, is a well-known traded currency among investors. Its value is broadly determined by the health of the New Zealand economy and the country’s central bank policy. Still, there are some unique particularities that also can make NZD move. The performance of the Chinese economy tends to move the Kiwi because China is New Zealand’s biggest trading partner. Bad news for the Chinese economy likely means less New Zealand exports to the country, hitting the economy and thus its currency. Another factor moving NZD is dairy prices as the dairy industry is New Zealand’s main export. High dairy prices boost export income, contributing positively to the economy and thus to the NZD.
The Reserve Bank of New Zealand (RBNZ) aims to achieve and maintain an inflation rate between 1% and 3% over the medium term, with a focus to keep it near the 2% mid-point. To this end, the bank sets an appropriate level of interest rates. When inflation is too high, the RBNZ will increase interest rates to cool the economy, but the move will also make bond yields higher, increasing investors’ appeal to invest in the country and thus boosting NZD. On the contrary, lower interest rates tend to weaken NZD. The so-called rate differential, or how rates in New Zealand are or are expected to be compared to the ones set by the US Federal Reserve, can also play a key role in moving the NZD/USD pair.
Macroeconomic data releases in New Zealand are key to assess the state of the economy and can impact the New Zealand Dollar’s (NZD) valuation. A strong economy, based on high economic growth, low unemployment and high confidence is good for NZD. High economic growth attracts foreign investment and may encourage the Reserve Bank of New Zealand to increase interest rates, if this economic strength comes together with elevated inflation. Conversely, if economic data is weak, NZD is likely to depreciate.
The New Zealand Dollar (NZD) tends to strengthen during risk-on periods, or when investors perceive that broader market risks are low and are optimistic about growth. This tends to lead to a more favorable outlook for commodities and so-called ‘commodity currencies’ such as the Kiwi. Conversely, NZD tends to weaken at times of market turbulence or economic uncertainty as investors tend to sell higher-risk assets and flee to the more-stable safe havens.
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