NZD/USD strengthens to near 0.6000 amid concerns over Fed’s independence
- NZD/USD gathers strength to near 0.6005 in Wednesday’s early session.
- Struggle over the Fed’s independence continues to undermine the US Dollar.
- Cooler CPI inflation in New Zealand hints at early rate cuts by RBNZ.
The NZD/USD pair trades in positive territory for the fourth consecutive day near 0.6005 during the Asian trading hours on Wednesday. Renewed concerns over the US Federal Reserve (Fed) independence drag the US Dollar (USD) lower against the New Zealand Dollar (NZD).
Investors will closely monitor whether the US central bank can maintain its independence amid mounting pressures and a situation that reflects the challenges facing the US economy. US Treasury Secretary Scott Bessent on Monday said the Fed’s independence on monetary policy is threatened by its "mandate creep" into non-policy areas, and he called on the US central bank to conduct an exhaustive review of those operations.
Meanwhile, Fed Vice Chair Michelle Bowman on Tuesday said the Fed's ability to set monetary policy without political interference is "very important.
Nonetheless, softer New Zealand CPI inflation has fueled the prospect of a Reserve Bank of New Zealand (RBNZ) interest rate cut in August. Traders expect the New Zealand central bank to deliver at least one additional rate cut over the remainder of the year. Traders have priced in nearly 85% odds that the RBNZ will reduce the cash rate by a further 25 basis points (bps) in the August meeting.
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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