NZD/USD gathers strength above 0.5800 as New Zealand exits recession
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- NZD/USD drifts higher to near 0.5820 in Wednesday's early Asian session.
- New Zealand’s GDP rose 0.7% QoQ in Q4, stronger than expected.
- Fed held interest rates steady and still sees two reductions coming this year.
The NZD/USD pair trades in a positive territory around 0.5820 during the early Asian session on Thursday. The New Zealand Dollar (NZD) gains ground after the stronger-than-expected growth data in the fourth quarter of 2024. However, the upside for the pair might be limited as the Federal Reserve (Fed) maintained its interest rates at its meeting, which supports the Greenback.
Data released by Statistics New Zealand on Thursday showed that New Zealand's Gross Domestic Product (GDP) grew by 0.7% QoQ in the fourth quarter (Q4) versus -1.1% prior (revised from -1.0%). This reading came in above the consensus of 0.4%. The annual Q4 GDP contracted by 1.1%, following a decline of 1.6% (revised from -0.3%) in Q3, while beating the estimation of a 1.4% fall. Kiwibank chief economist Jarrod Kerr said New Zealand was crawling out of recession. The Kiwi trades slightly firmer in an immediate reaction to the upbeat GDP data.
The Fed kept the federal funds rate at a range of 4.25% to 4.5% at its March meeting on Wednesday, as widely expected. That said, the US central bank maintained its outlook at two rate cuts coming in the remainder of this year, citing the uncertainty from US President Donald Trump’s tariff policies.
During a press conference, Federal Chair Jerome Powell noted, “Labor market conditions are solid, and inflation has moved closer to our 2% longer-run goal, though it remains somewhat elevated.” The more hawkish comments from the Fed officials could support the Greenback and act as a headwind for the NZD/USD pair in the near term.
(This story was corrected on March 20 at 11:33 GMT to say that annual Q4 GDP contracted by 1.1% following a decline of 1.6% (revised from -0.3%) in Q3, not a decline of 0.3% in Q3.)
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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