NZD/USD retreats below 0.5850 weighed by a cautious market mood
- The US Dollar prevails in a cautious market, with renewed debt concerns weighing on risk appetite.
- The New Zealand Dollar has lost more than 1% after pulling back from levels past 0.5900 on Monday.
- Upbeat services activity data from China failed to cheer NZD buyers earlier on Wednesday.
The US dollar continues to outperform its main peers on Wednesday, as debt fears return to the market, to the detriment of risk-sensitive currencies like the New Zealand Dollar, which has depreciated by more than 1% from Tuesday’s highs.
The Kiwi Dollar was rejected at two-week highs around 0.5915 earlier this week and has returned below 0.5850 in Wednesday’s early European trading session, with bears aiming for Tuesday’s lows, near 0.5835.
Fears of a global debt crisis are boosting safe-haven assets
Renewed concerns about the mounting fiscal deficits in the world’s major economies have triggered a sell-off in government bonds, pushing long-term yields higher globally. Fears about another debt crisis have crushed risk appetite, triggering a rush to safety that is boosting the USDollar and Gold.
The Greenback was undaunted by the downbeat US ISM Manufacturing PMI figures, which showed that business activity in the sector contracted for the sixth straight month in August.
The dismal market mood has offset the positive services activity data from China, New Zealand’s leading trading partner. The Caixin Services PMI has jumped to a 15-month high of 53.0 in August, from 52.6 in July, improving the outlook of the world’s second largest economy.
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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