NZD/USD rebounds amid USD pullback, RBNZ tightening expectations

• NZD/USD advances on Tuesday, benefiting from a pullback in the US Dollar after two days of gains.
• The New Zealand Dollar is supported by expectations of monetary tightening by the RBNZ later this year.
• US Treasury yields remain elevated, which could nevertheless limit the extent of the pair’s rebound.

NZD/USD recovers and trades around 0.6050 on Tuesday at the time of writing, up 0.75% on the day, after two consecutive days of decline. The rebound mainly reflects a pause in the appreciation of the US Dollar (USD), which is giving back part of its recent gains against major currencies.

The Greenback remains supported in the background by elevated US Bond yields. The yield on the 10-year US Treasury note hovers around 4.27%, following a sharp rise in the previous day. This upward pressure on yields is driven by US macroeconomic data seen as solid and by cautious monetary policy expectations from the Federal Reserve (Fed), which could cap a deeper pullback in the US Dollar in the near term.

In the United States (US), the latest manufacturing data surprised to the upside. The Institute for Supply Management (ISM) Manufacturing Purchasing Managers’ Index (PMI) rose sharply, signaling a return to expansion territory and highlighting the resilience of the US economy. These figures support the view that the Fed can afford to keep policy restrictive for longer, despite recent comments from some officials arguing for monetary easing.

On the New Zealand side, the local currency remains broadly supported despite mixed domestic data. Building permits released by Statistics New Zealand fell in December, reversing the increase seen in the previous month and underscoring ongoing fragility in the housing sector. These figures, however, have not had a lasting negative impact on the New Zealand Dollar (NZD).

The main support for the Kiwi comes from monetary policy expectations. Investors believe the Reserve Bank of New Zealand (RBNZ) could begin raising interest rates later in the year. The first policy meeting under the leadership of the new Governor, Anna Breman, is being closely watched, as markets look for clear guidance on the central bank’s future policy stance.

Sentiment around the NZD is also helped by a more favorable external backdrop. Encouraging indicators from China, New Zealand’s largest trading partner, point to an improvement in manufacturing activity, reinforcing the outlook for growth-sensitive currencies.

Market participants are now turning their attention to upcoming New Zealand labor market data due later in the day. The fourth-quarter Unemployment Rate is expected to remain steady at 5.3%, while employment is forecast to increase modestly. These figures could play a key role in shaping short-term NZD/USD dynamics by refining expectations for the RBNZ’s policy path.