- NZD/USD weakens around 0.5945 in Wednesday’s early Asian session, down 0.25% on the day.
- Rising expectations of RBNZ rate cuts and sluggish Chinese economic activity exert some pressure on the Kiwi.
- The Fed is expected to cut 25 bps in the September and December FOMC meeting, according to UBS analyst.
The NZD/USD pair faces some selling pressure near 0.5945 during the early Asian session on Wednesday. The risk-off sentiment and modest rebound of the Greenback drag the pair lower to the lowest level since May 2. Traders will keep an eye on preliminary US S&P Global PMIs for June on Wednesday for fresh impetus.
The New Zealand Dollar (NZD) edges lower due to rising expectations of an imminent rate cut by the Reserve Bank of New Zealand (RBNZ) after the softer Consumer Price Index (CPI) inflation for New Zealand in the second quarter (Q2). Additionally, the concerns about sluggish Chinese economic activity and a surprise rate cut by the People's Bank of China (PBoC) earlier this week contributed to the Kiwi's decline.
The markets expect the US Federal Reserve (Fed) to start cutting rates beginning with the Federal Open Market Committee's September 2024 meeting. Chief US economist at UBS, Jonathan Pingle, said "We expect a 25-basis-point reduction in the target range at the September and December FOMC meetings, barring a meaningful upside surprise in the inflation data.” Rate traders are currently pricing in a nearly 96% chance of a Fed rate cut in September, according to the CME FedWatch Tool. The rising bets of the Fed rate cut weigh on the Greenback broadly and might cap the downside for the pair.
Investors will take more cues from the US preliminary S&P Global PMIs for July to affirm the rate outlook. The Manufacturing PMI is projected to improve to 51.7 in July from 51.6 in June, while the Services PMI is forecast to ease slightly to 54.4 in July from 55.3.
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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