- NZD/USD may face headwinds as the recent easing of inflation strengthens the case for the RBNZ’s rate cut in November.
- New Zealand's Consumer Price Index rose 2.2% YoY in the September quarter, bringing inflation within the RBNZ’s 1-3% target range.
- The US Dollar appreciates as strong US labor and inflation data have faded the odds of the Fed’s aggressive rate cuts.
NZD/USD breaks its three-day losing streak, trading around 0.6070 during the Asian hours on Thursday. However, the upside for the AUD/USD pair could be limited by recent data showing that inflation in New Zealand has slowed to its lowest level in over three years. This has increased the likelihood of the Reserve Bank of New Zealand (RBNZ) reducing interest rates at its next monetary policy meeting in November.
New Zealand's Consumer Price Index (CPI) rose 2.2% year-over-year in the September quarter, down from the 3.3% annual increase in the previous quarter. "For the first time since March 2021, annual inflation is within the Reserve Bank of New Zealand’s (RBNZ) target range of 1% to 3%. Prices are still increasing but at a slower rate than before," said Nicola Growden, consumer prices manager at Stats NZ.
Market participants are likely to remain cautious ahead of key economic data from China, New Zealand's top trading partner, scheduled for release on Friday. This includes GDP and Retail Sales data, following the recent disappointment in China's CPI and PPI figures.
The New Zealand Dollar (NZD) faced challenges as China's recently announced fiscal stimulus plan did little to lift market sentiment, as investors remain uncertain about the scale and impact of the package.
The US Dollar (USD) found support from strong labor and inflation data, which has tempered expectations for aggressive easing by the Federal Reserve (Fed). According to the CME FedWatch Tool, there is currently a 92.1% probability of a 25-basis-point rate cut in November, with no expectation of a larger 50-basis-point reduction.
Traders are keenly awaiting the US Retail Sales data, set to be released later in the North American session. Expectations are for monthly consumer spending to increase by 0.3% in September, up from 0.1% in the previous reading.
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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