NZD/USD seems vulnerable below mid-0.6200s amid sustained USD buying
|- NZD/USD drifts lower for the third straight day amid a further USD recovery from the YTD low.
- Reduced bets for a 50 bps Fed rate cut in November and geopolitical risks boost the Greenback.
- Expectations that the RBNZ will start cutting rates next week favor bears ahead of the US data.
The NZD/USD pair prolongs this week's retracement slide from the 0.6375-0.6380 region, or its highest level since July 2023 and remains under some selling pressure for the third successive day on Thursday. The downward trajectory drags spot prices below mid-0.6200s, or a one-and-half-week low during the Asian session and is sponsored by some follow-through US Dollar (USD) buying.
In fact, the USD Index (DXY), which tracks the Greenback against a basket of currencies, prolongs this week's recovery from its lowest level since July 2023 for the third successive day and climbs to a three-week top. The incoming US data pointed to a still resilient labor market and forced investors to scale back their expectations for a more aggressive policy easing by the Federal Reserve (Fed). This, along with persistent geopolitical risks stemming from the ongoing conflicts in the Middle East, benefits the safe-haven buck and contributes to driving flows away from the risk-sensitive Kiwi.
Iran launched over 200 ballistic missiles at Israel on Tuesday, while the latter conducted a precise air strike and bombed central Beirut in Lebanon during the early hours of Thursday. This raises the risk of a full-blown war in the region and tempers investors' appetite for perceived riskier currencies, including the New Zealand Dollar (NZD). Apart from this, expectations that the Reserve Bank of New Zealand (RBNZ) will start cutting interest rates next week suggest that the path of least resistance for the NZD/USD pair is to the downside and supports prospects for a further downfall.
Market participants now look to the US economic docket – featuring the release of the usual Weekly Initial Jobless Claims and the ISM Services PMI. This, along with speeches by influential FOMC members and the broader risk sentiment, will drive the USD demand and provide a fresh impetus to the NZD/USD pair later during the North American session. The focus, however, remains glued to the closely-watched US monthly employment details, popularly known as the Nonfarm Payrolls (NFP) report on Friday, which should help in determining the next leg of a directional move.
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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