- NZD/USD bounces off a nearly three-month low, albeit lacks any follow-through buying.
- A combination of factors undermines the safe-haven USD and lends support to the major.
- China’s economic woes cap any further gains ahead of the key US PCE Price Index data.
The NZD/USD pair edges higher during the Asian session on Friday and for now, seems to have snapped a six-day losing streak to its lowest level since early May, around the 0.5880 region touched the previous day. Spot prices, however, struggle to build on the modest intraday strength beyond the 0.5900 round-figure mark as traders keenly await the crucial US inflation data before placing directional bets.
The US Personal Consumption Expenditures (PCE) Price Index is due for release later today and should provide fresh cues about the Federal Reserve's (Fed) policy path. This, in turn, will play a key role in driving the US Dollar (USD) demand in the near term and provide some meaningful impetus to the NZD/USD pair. Heading into the key data risk, bets for an imminent start of the Fed's rate-cutting cycle keep the USD bulls depressed below a two-week high touched on Wednesday and act as a tailwind for the currency pair.
Investors seem convinced that the US central bank will lower borrowing costs in September and are pricing in the possibility of two more rate cuts by the end of this year. This, to a larger extent, overshadows the upbeat US macro data released on Thursday, which showed that the world's largest economy grew at a faster-than-expected pace during the second quarter of 2024. Adding to this, the US Initial Jobless Claims dropped to 235K in the week ending July 20 vs. 238K expected, though does little to impress the USD bulls.
Apart from this, a generally positive tone around the equity markets undermines the safe-haven buck and benefits the risk-sensitive New Zealand Dollar (NZD). That said, persistent worries about a slowdown in China – the world's second-largest economy – might continue to act as a headwind for antipodean currencies, including the Kiwi. Adding to this, rising bets for an early interest rate cut by the Reserve Bank of New Zealand (RBNZ), bolstered by the weaker CPI report released last week, contribute to capping the NZD/USD pair.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.
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