New Zealand Dollar declines due to increased risk aversion
- NZD/USD depreciates as the US Dollar receives safe-haven flows stemming from rising US-Iran geopolitical tensions.
- Fed rate hike expectations drop to 35% after weak US labor and inflation data.
- The NZD may gain on expectations of a 25-basis-point RBNZ rate hike next month.
NZD/USD depreciates after two days of losses, trading around 0.5880 during the European hours on Tuesday. The pair depreciates as the US Dollar (USD) holds ground on safe-haven flows amid escalating geopolitical tensions between the US and Iran.
US President Donald Trump stated he has no interest in renewing the expiring agreement with Iran, pointing to the active naval blockade of Iranian ports as leverage and reiterating his intention to declare the vital waterway as total American territory.
However, the Greenback may struggle as hawkish expectations surrounding the Federal Reserve fade. A recent, unexpected decline in July US Nonfarm Payrolls alongside modest consumer price inflation figures has weakened the case for imminent monetary tightening. Consequently, CME FedWatch Tool data shows the probability of a Fed rate hike at the next meeting has fallen to 35%, down from 47% a month ago.
Additionally, the downside of the NZD/USD pair could be restrained as the New Zealand Dollar (NZD) receives support from expectations that the Reserve Bank of New Zealand (RBNZ) will deliver another 25-basis-point rate hike next month, following repeated signals that monetary policy needs to become less accommodative.
However, Commerzbank’s Volkmar Baur highlights that, while New Zealand’s full inflation figures are only released quarterly, there is a useful interim gauge: “Stats NZ publishes a Selected Price Index every month for about half of all prices, which typically reflects the trend in the full inflation figures very well.” He notes that this monthly index “fell to 3.5% year-over-year in July, down from 4.9% in June,” underscoring the recent softening in inflation that underpins expectations for the RBNZ to pause after July’s rate hike, even as the central bank maintains a hawkish tone in light of ongoing Middle East risks.
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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