New Zealand Dollar weakens below 0.5850 as hot US PPI lifts US Dollar
- NZD/USD weakens to near 0.5820 in Friday’s early European session.
- US PPI rose more than expected in May as energy drove producer inflation pressures.
- RBNZ signaled that interest rates will likely rise sooner and higher than previously expected.
The NZD/USD pair attracts some sellers to around 0.5820 during the early European trading hours on Friday. The US Dollar (USD) edges higher against the New Zealand Dollar (NZD) on hot US Producer Price Index (PPI) inflation data. Traders await the preliminary reading of the Michigan Consumer Sentiment Index for June later on Friday for fresh impetus.
Data released by the US Bureau of Labor Statistics on Thursday showed that US producer prices increased more than expected in May, leading to the highest level since November 2022. The US Producer Price Index (PPI) climbed 6.5% YoY in May, compared to 5.7% in the previous reading, hotter than the market expectation of 6.4%. On a monthly basis, the PPI rose by 1.1% in May, above the market consensus of 0.7%.
“The Fed is clearly missing its inflation target by a lot more than it is missing its employment objective," said John Ryding, chief economic advisor at Brean Capital. "The PPI report should further embolden those on the FOMC who think a rate hike might be needed later in the year,” Ryding added.
A hawkish stance from the Reserve Bank of New Zealand (RBNZ) might help limit the Kiwi’s losses. RBNZ Governor Anna Breman said that the Official Cash Rate (OCR) is likely to increase sooner and by more than previously signaled, citing Middle East conflict-driven inflation, weaker growth and rising input costs across New Zealand and its trading partners. Markets have repriced the New Zealand rate outlook, with traders now expecting multiple hikes through early 2027.
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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