New Zealand Dollar advances as ANZ outlook jumps
- NZD/USD rises as New Zealand’s ANZ Business Outlook Index jumped to 36.6 in June, hitting a multi-month high.
- New Zealand's big four banks forecast a Q2 economic contraction, leading markets to scale back expectations for aggressive RBNZ tightening.
- CME FedWatch tool suggests that traders are now pricing in above 60% probability of a Fed rate hike by September.
NZD/USD gains ground for the second successive day, trading around 0.5650 during the European hours on Tuesday. The New Zealand Dollar (NZD) maintains its upward momentum, drawing strong support from a sharp rebound in domestic sentiment.
The key catalyst was New Zealand’s ANZ Business Outlook Index, which surged to 36.6 in June from 10.0 in the previous month. This marked the highest confidence reading since February, providing the Kiwi pair with solid near-term backing. Additionally, a recent pullback in global oil prices following a US-Iran nuclear agreement helped ease immediate, near-term inflation anxieties across the market.
However, the NZD/USD pair may face uphill battles moving forward as the broader economic fallout from the earlier energy shock continues to linger. Highlighting these underlying vulnerabilities, New Zealand's four major banks all forecast the domestic economy to contract in the second quarter. This economic strain has forced market participants to scale back their expectations for aggressive monetary tightening by the Reserve Bank of New Zealand (RBNZ).
Markets are now pricing in just a 66% chance of a July rate hike, down significantly from over 80% a few weeks earlier, and anticipate only two interest rate increases this year rather than the previously expected three.
The upside of the NZD/USD pair could be restrained as the US Dollar (USD) receives support from growing expectations of a hawkish Federal Reserve interest rate path. According to the CME FedWatch tool, traders are now pricing in above 60% probability of a Fed interest rate hike by September.
Traders are looking ahead to Wednesday's US ADP employment data and Thursday's Nonfarm Payrolls (NFP) report for clues on the Federal Reserve's next policy moves. A stronger-than-expected jobs report could reinforce the Fed's "higher-for-longer" interest rate stance, potentially dampening appetite for risk-sensitive assets.
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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