NZD/USD remains below 0.6000 as downside risks persist due to dovish mood surrounding RBNZ
|- NZD/USD receives downward pressure as RBNZ is widely expected to deliver another 50-basis-point rate cut in November.
- The NZD could gain support from favorable results stemming from China's initiatives, its largest trading partner.
- The US Dollar appreciates as recent positive economic data reinforces expectations for nominal rate cuts by the Fed.
The NZD/USD pair steadies near 0.5980 during the Asian session on Tuesday after two days of losses. However, downside risks for the New Zealand Dollar (NZD) remain as the Reserve Bank of New Zealand (RBNZ) is expected to deliver another 50-basis-point rate cut in its final policy meeting of the year in November, with markets even considering the possibility of a 75-basis-point cut.
On Monday, China's Vice Minister of Finance, Liao Min, announced plans to enhance countercyclical adjustments in macroeconomic policies to foster economic recovery in the fourth quarter. Positive outcomes from these initiatives could bolster the NZD, considering China's importance as a key trading partner for New Zealand.
UOB Group’s FX analysts, Quek Ser Leang and Lee Sue Ann observed that while there hasn't been a significant increase in momentum over the long term, the weakness in the New Zealand dollar (NZD) has yet to stabilize. If the NZD does not breach the 0.6010 level, it could fall below 0.5970 before any stabilization occurs, with the next key level to monitor being 0.5950.
Read More: A dip below 0.5970 is possible – UOB Group
The US Dollar (USD) strengthens as positive economic data from last week suggests ongoing resilience in the US economy. This bolsters expectations for nominal interest rate cuts by the Federal Reserve (Fed) in November. The CME FedWatch Tool indicates a 95.8% probability of a 25-basis-point rate cut in November, with no anticipation of a larger 50-basis-point reduction.
Traders await the release of the preliminary US Q3 Gross Domestic Product (GDP) figures and October's Nonfarm Payrolls (NFP) report, which are expected to offer crucial insights into the timing and pace of the Federal Reserve's anticipated rate cuts. Additionally, PMI data from China will be closely monitored later in the week.
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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