New Zealand Dollar gains as traders price in future RBNZ rate hikes
- NZD/USD rose following PBOC's decision to keep benchmark rates unchanged at 3.00% and 3.50%.
- RBNZ rate hike expectations remain high ahead of crucial upcoming inflation data.
- USD weakness supported the pair as markets bet on unchanged Fed rates in October.
NZD/USD extends its gains for the fourth consecutive day, trading around 0.5690 during European hours on Tuesday. The pair appreciated as the New Zealand Dollar (NZD) held its losses following the latest interest rate announcement from the People’s Bank of China (PBOC). On Tuesday, China's central bank decided to keep its benchmark Loan Prime Rates (LPRs) unchanged, maintaining the one-year LPR at 3.00% and the five-year LPR at 3.50%.
Markets are largely pricing in a third consecutive rate hike next week, which would lift the policy rate to 3.00%, with further increases expected to push rates to 3.75% or higher next year, well above the Reserve Bank of New Zealand’s (RBNZ) estimate of 3.20%. Last week, Chief Economist Paul Conway stated that the late-October decision remained open, adding that the central bank still viewed a higher official cash rate as the most likely next move, though it had not yet decided on the timing. Consequently, the upcoming inflation report will be crucial in assessing whether further tightening is warranted.
Meanwhile, the NZD/USD pair gained ground as the US Dollar (USD) struggled amid growing market expectations that the Federal Reserve (Fed) will leave interest rates unchanged. Fed Chair Kevin Warsh expressed optimism last week regarding the resilience of the US economy, though he refrained from offering specific guidance on the timing or likelihood of future rate adjustments.
According to the CME FedWatch tool, Fed funds futures traders expect the central bank to maintain current rates at its October policy meeting, while pricing in a 93.5% probability of a rate hike in December.
Dollar rally seen losing steam as TD Securities flags signs of topping
According to TD Securities, “after a month of relentless rally, the USD shows signs of topping,” with the team highlighting that the recent surge in the Dollar now appears to be running into resistance as momentum fades.
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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