NZD/USD edges higher to mid-0.5900s amid USD downtick; upside potential seems limited
- NZD/USD attracts some buyers on Tuesday, though the upside potential seems limited.
- Rising geopolitical tensions might continue to benefit the safe-haven USD and cap gains.
- The EBNZ’s accommodative policy outlook also warrants some caution for the NZD bulls.
The NZD/USD pair edges higher during the Asian session on Tuesday, though it lacks bullish conviction and remains within striking distance of over a five-week low, touched the previous day. Spot prices currently trade around mid-0.5900s, up 0.15% for the day.
The US Dollar retreats slightly from its highest level since January 20, set on Monday, and turns out to be a key factor acting as a tailwind for the NZD/USD pair. That said, a dramatic escalation of geopolitical tensions in the Middle East continues to weigh on investors' sentiment, which should act as a tailwind for the safe-haven Greenback and keep a lid on the currency pair.
The US and Israel launched strikes against Iran over the weekend, killing Supreme Leader Ayatollah Ali Khamenei. In response, Iran launched attacks on Israel and several other Middle Eastern countries, fueling the risk of a broader regional conflict. Adding to this, Iran's Islamic Revolutionary Guards Corps (IRGC) announced the stoppage of shipments through the Strait of Hormuz.
US President Donald Trump said that the big wave is yet to come, underscoring the risk of a prolonged war. Moreover, Secretary of State Marco Rubio stated that the US is preparing for a major uptick in attacks in Iran over the next 24 hours. The US State Department urged US citizens to depart immediately from countries throughout the Middle East due to serious safety risks.
Meanwhile, a strong US Producer Price Index (PPI), released last Friday, forced traders to trim their bets for more aggressive policy easing by the Federal Reserve (Fed). This could further support the USD and cap the NZD/USD pair on the back of the Reserve Bank of New Zealand's (RBNZ) accommodative policy outlook, warranting some caution for bullish traders.
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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