- NZD/USD moves higher to near 0.5785, while the US Dollar exhibits a subdued performance.
- The Fed is almost certain to announce a 25-bps interest rate reduction in the policy meeting on Wednesday.
- The NZ economy is expected to have declined by 0.4% in the third quarter.
The NZD/USD pair rises to near 0.5785 in Monday’s North American session after refreshing a yearly low near 0.5750 on Friday. The Kiwi pair gains as the US Dollar (USD) exhibits a subdued performance, with investors focusing on the Federal Reserve’s (Fed) interest rate decision, which will be announced on Wednesday.
Investors expect the Fed to cut interest rates by 25 basis points (bps) to 4.25%- 4.50%. Market participants will focus primarily on Fed Chair Jerome Powell’s commentary in the press conference after the policy decision to gauge the impact of President-elect Donald Trump’s policies on the interest rate outlook.
According to analysts at Macquarie, the Fed’s stance on the interest rate outlook could turn “slightly hawkish” from “dovish.” “The recent slowdown in the pace of US disinflation, a lower Unemployment Rate than what the Fed projected in September, and exuberance in US financial markets are contributing to this more hawkish stance,” analysts at Macquarie said.
Meanwhile, the New Zealand Dollar (NZD) will be guided by the Q3 Gross Domestic Product (GDP) data, which will be published on Thursday. The New Zealand (NZ) economy is estimated to have contracted by 0.4% compared to the same quarter of the previous year, slower than the 0.5% decline in the previous quarter.
The NZD/USD daily chart shows a Bullish Divergence, which suggests a slowdown in selling momentum that results in a reversal move. While the asset has formed a lower low on a daily timeframe, the 14-day Relative Strength Index (RSI) has made higher lows. The formation needs confirmation to set off a bullish reversal.
A decisive break above the November 29 high of 0.5930 could confirm a reversal setup and push it higher to the November 15 high of 0.5970 and the psychological resistance of 0.6000.
However, the chances of a bullish divergence confirmation are weak due to unsupportive NZ fundamentals. If the Kiwi pair breaks below the two-year low of 0.5770, it could fall to the November 2022 low of 0.5740 and the round-level support of 0.5700.
NZD/USD daily chart
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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