NZD/USD remains under selling pressure below 0.6000 on rising RBNZ rate cut bets
- NZD/USD trades on a softer note near 0.5975 in Tuesday’s early Asian session, down 0.10% on the day.
- The rising bets on RBNZ rate cuts and surprise rate cuts by the Chinese central bank weigh on the Kiwi.
- Fed officials said the time for a US rate cut is drawing closer.
The NZD/USD pair trades in negative territory for the fourth consecutive day around 0.5975 during the early Asian trading hours on Tuesday. The rising expectation that the Reserve Bank of New Zealand (RBNZ) will cut interest rates sooner than later drags the Kiwi lower against the US Dollar (USD).
The softer New Zealand’s Consumer Price Index (CPI) inflation in the second quarter (Q2) fuelled bets that the RBNZ will cut interest rates sooner than expected. This, in turn, weighs on the New Zealand Dollar (NZD) in the near term. The CPI inflation dropped to 0.4% QoQ in Q2 from 0.6% in Q1, while annualized CPI inflation came in at 3.3% YoY compared to the previous period's 4.0%.
Furthermore, surprise rate cuts by the People's Bank of China (PBoC) on Monday have undermined the China-proxy Kiwi as China is New Zealand's largest trade partner for both imports and exports. The Chinese central bank decided to cut the one-year and five-year Loan Prime Rate (LPR), benchmarks for the loans banks make to their customers, by 10 basis points (bps).
On the USD’s front, Federal Reserve (Fed) Chair Jerome Powell noted that he is becoming more hopeful about the progress on inflation in recent months. Meanwhile, Fed Governor Christopher Waller stated that the time to lower the policy rate is drawing closer. Traders are now pricing in the odds of a move at its July meeting less than 5% and pricing in a nearly full rate cut is firmly expected in September, according to the CME FedWatch Tool.
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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