- NZD/USD gains traction to around 0.5860 in Monday’s Asian session, up 0.55% on the day.
- RBNZ is likely to reduce the OCR by 50 bps on Wednesday, bringing the rate to 4.25%.
- The cautious stance from the Fed might support the USD.
The NZD/USD pair gathers strength to near 0.5860 on Monday during the Asian trading hours, bolstered by the softer US Dollar (USD). All eyes will be on the Reserve Bank of New Zealand (RBNZ) interest rate decision on Wednesday.
Data released by Statistics New Zealand on Monday showed that the country’s Retail Sales dropped by 0.1% QoQ in the third quarter (Q3), compared to the previous reading of a 1.2% fall. Retail sales fell for the second consecutive quarter as high interest rates dampened consumer sentiment, adding to signs that the economy was in recession in the middle of the year.
Furthermore, investors expect aggressive interest rate cuts from the RBNZ, which might exert some selling pressure on the Kiwi. The swaps market is pricing in a 50 basis points (bps) cut on Wednesday, with some seeing a small chance of a 75 bps reduction.
Meanwhile, the US Dollar Index (DXY), which measures the USD against a basket of currencies, currently trades near 106.85, down 0.62% on the day. The weaker Greenback acts as a tailwind for the NZD/USD pair.
However, the cautious stance from the Federal Reserve (Fed) might cap the USD’s downside. Fed Governor Michelle Bowman said last week that the Fed’s progress toward 2% inflation has “stalled” and the US central bank should proceed "cautiously" when cutting interest rates. Additionally, Chicago Fed President Austan Goolsbee noted that it may make sense to slow the pace of interest rate cuts as the Fed gets close to where rates will settle.
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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