The New Zealand Dollar's slump runs into RBNZ inflation expectations
- NZD/USD falls a third straight day and is back near its November 6 low.
- A December Fed hike is fully priced while the RBNZ's rate stays at 2.75%.
- The RBNZ's quarterly inflation expectations survey is due on Tuesday.
Monday's post-election bounce in the Kiwi lasted one session, and three straight falls since have put it back beside its lowest level in more than 18 months. NZD/USD is trading around 0.5550, and Thursday's low was only slightly lower. That's below where Monday's bounce started and a short distance above the November 6 low.
San Francisco Fed President Daly said on Thursday that more tightening will be needed, without saying how much or when, and futures have a December 9 hike fully priced. The Reserve Bank of New Zealand (RBNZ) held its Official Cash Rate (OCR) at 2.75% on October 28. US rates are 3.75%-4.00%, so a Fed hike widens a gap that's already at least a full percentage point.
Preliminary counts from New Zealand's November 7 election give National, ACT and New Zealand First 67 of 131 seats, one more than a majority, and nearly 400K votes stay uncounted until November 27. Labour would add employment back to the RBNZ's mandate with unemployment at 5.7%, which points to lower rates for the Kiwi. The Business NZ manufacturing index also fell to 54.9 in October from 56.5, which takes pressure off the RBNZ to follow the Fed.
On the calendar
Business NZ's services index is due at 21:30 GMT on Sunday, after 50.9 in September. The RBNZ's Financial Stability Report follows at 20:00 GMT on Monday, and its quarterly survey of inflation expectations at 02:00 GMT on Tuesday, November 17, after 2.34% last time. That survey feeds the RBNZ's next rate decision.
US producer prices come first, at 13:30 GMT on Friday, and San Francisco Fed President Daly speaks again at 17:00 GMT. October retail sales are due at 13:30 GMT on Tuesday, November 17, forecast flat after a 0.8% rise, and both go into the Fed's December 9 decision.
On the charts
Each bounce since August has peaked lower than the last: just under 0.6000 on August 21, near 0.5700 in late October and 0.5650 on November 10. The November 6 low, between 0.5500 and 0.5550, is the lowest point on a daily chart that starts in late June. The pair has fallen in four of the last five sessions.
NZD/USD daily chart
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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