NZD/USD holds steady above 0.5700; stalls overnight pullback from one-month peak
- NZD/USD trades with a mild negative bias on Tuesday, though the downside remains cushioned.
- The divergent RBNZ-Fed policy expectations should continue to act as a tailwind for spot prices.
- Traders might also opt to wait on the sidelines ahead of this week’s important US macro releases.
The NZD/USD pair ticks lower during the Asian session on Tuesday and moves further away from an over one-month peak, around mid-0.5700s, touched the previous day. Spot prices currently trade near the 0.5720 region, though the fundamental backdrop warrants some caution for bearish traders and before positioning for deeper losses.
The New Zealand Dollar (NZD) might continue to draw support from the Reserve Bank of New Zealand's (RBNZ) hawkish outlook on the future policy path. The US Dollar (USD), on the other hand, languishes near a two-week low set on Monday amid bets for another rate cut by the Federal Reserve (Fed) this month, which acts as a tailwind for the NZD/USD pair. Apart from this, the upbeat market mood undermines the safe-haven buck and could benefit the risk-sensitive Kiwi.
The RBNZ delivered a fully priced 25 basis points (bps) rate cut last week and signaled an end to its easing cycle. In contrast, the recent comments from several Fed officials suggested that another interest rate cut in December is a live option. Moreover, tepid US economic data released recently indicated that growth in the world's largest economy is cooling and inflationary pressures are muted. This, in turn, backs the case for further policy easing by the Fed and favors the USD bears.
Traders, however, seem reluctant to place aggressive bets and opt to wait for this week's important US macro data, including the Personal Consumption Expenditure (PCE) Price Index on Friday. The crucial inflation data will play a key role in driving the USD demand and providing some impetus to the NZD/USD pair heading into next week's key central bank event risk – the highly anticipated two-day FOMC meeting starting next Tuesday.
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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