NZD/USD holds positive ground above 0.6250, US PCE inflation data looms
|- NZD/USD trades in positive territory around 0.6260 in Friday’s early European session.
- The upbeat US GDP growth report supports the USD, but higher Fed rate cut bets might cap its upside.
- The optimism in New Zealand’s business confidence boosts the Kiwi.
The NZD/USD pair extends the rally near 0.6260 during the early European session on Friday. The pair is set to close weekly gains for the fifth consecutive week, bolstered by firmer speculation that the Federal Reserve (Fed) will start easing its monetary policy in September. The release of the US Personal Consumption Expenditure (PCE) inflation data will be in the spotlight on Friday.
The US economy grew at an annualized rate of 3.0% for the second quarter (Q2) from 2.8% in the initial estimate, the Bureau of Economic Analysis (BEA) showed Thursday. This figure came in stronger than the expectation of 2.8%. Meanwhile, the number of Americans filing new applications for jobless benefits for the week ending August 24 dropped to 231,000 from 233,000 in the previous week, below the consensus of 232,000.
The encouraging US economic data on Thursday provides some support for the Greenback. However, the upside seems limited as traders anticipate the US Fed to lower its borrowing costs next month. The rate futures markets have priced in around 66% odds of a 25 basis points (bps) rate cut in September, but the chance of a deeper rate cut stands at 34%, down from 36.5% before the US GDP data, according to the CME FedWatch Tool.
Investors will take more cues from the key US inflation data, which is due later on Friday. Any signs of elevated inflation in the US economy could dampen the hope for a Fed rate cut in September. This, in turn, might support the USD and cap the upside for NZD/USD. On Thursday, Atlanta Fed President Raphael Bostic said that there is still a distance to go on inflation. Bostic added that the central bank should wait for more employment and inflation report data before cutting rates.
On the Kiwi front, the recent New Zealand’s ANZ Business Outlook survey, which climbed to its highest level in a decade, boosts the New Zealand Dollar (NZD). The headline business confidence measure in the survey jumped to 51.0 in August, while the expected own activity measure surged to a seven-year high of 37.0.
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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