- NZD/USD gains to near 0.6230 amid weakness in the US Dollar ahead of the US official employment data for August.
- Investors see the Fed reducing interest rates this month.
- The US Unemployment Rate is seen declining to 4.2% in August.
The NZD/USD pair moves higher to near 0.6230 in Friday’s European session. The Kiwi asset gains as the US Dollar (USD) extends its downside amid growing risks to the United States (US) labor market health due to the long maintenance of restrictive monetary policy stance by the Federal Reserve (Fed).
The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, falls below 101.00.
Downside risks to US job market appears to be escalating as new job vacancies and labor demand in the private sector have slowed down significantly. Expanding cracks on the US labor market health has prompted expectations that the Fed could start reducing interest rates this month.
While the Fed is almost certain to begin cutting its key borrowing rates from this month, traders remain split over the likely interest rate cut size. According to the CME Fedwatch tool, the possibility for the Fed to begin reducing interest rates by 50 basis points (bps) to 4.75%-5.00% has increased to 41% from 34% recorded a week ago.
For fresh cues about Fed’s potential rate cut size, investors will focus on the US Nonfarm Payrolls (NFP) data for August, which will be published at 12:30 GMT. The NFP report is expected to show that US employers hired 160K new workers in August, higher from 114K in July. In the same period, the Unemployment Rate is expected to have declined to 4.2% from the former release of 4.3%. Signs of weak labor demand and rising jobless rate would boost Fed large rate cut bets, while upbeat figures would do the opposite.
On the Kiwi front, the New Zealand Dollar (NZD) performs strongly on expectations of liquidity boost from the People’s Bank of China (PBoC). PBoC Deputy Governor Lu Lei said on Thursday, “central bank will continue to implement supportive policy.” He added, “Central bank will steadily lower financing costs for firms, credit costs for residents.”
The continuation of supportive interest rate policy will uplift the economic growth, which will increase foreign flows to the New Zealand, being on of its major trading partners.
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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