NZD/USD attracts some buyers above 0.5900 as Fed rate cut bets remain intact
- NZD/USD gathers strength to near 0.5935 in Monday’s early European session, up 0.20% on the day.
- Financial markets currently expect a rate cut at the Fed's September 16-17 meeting.
- The RBNZ is anticipated to cut its OCR to 3.0% from 3.25% on Wednesday.
The NZD/USD pair gains traction to around 0.5935 during the early European session on Monday. The US Dollar (USD) edges lower against the New Zealand Dollar (NZD) as anticipation mounts of a Federal Reserve (Fed) interest rate cut. Investors await the Reserve Bank of New Zealand (RBNZ) interest rate decision and the release of FOMC Minutes later on Wednesday.
The Greenback remains weak as US economic data keep the case for a September Federal Reserve (Fed) interest rate cut intact. According to the CME FedWatch tool, markets are now pricing in an 84% odds the Fed would reduce rates by a quarter point next month, down from 98% last week.
US Retail Sales increased solidly in July, though a softening labor market and higher goods prices could curb consumer spending growth in the third quarter. Additionally, a survey from the University of Michigan on Friday showed that Consumer Inflation Expectations, which increased in August, further dimmed the possibility of an oversized interest rate cut by the US central bank in the September meeting.
Traders will take more cues from the Jackson Hole Economic Policy Symposium, with Fed Chair Jerome Powell’s speech keenly watched for guidance on a September interest-rate cut after recent US data.
Data released by Business NZ on Monday showed that New Zealand’s Performance of Services Index (PSI) improved to 48.9 in July from 47.6 in June (revised from 47.3). This upbeat data provides some support to the Kiwi against the USD.
The RBNZ is expected to lower the official cash rate to 3.0% from 3.25% at its August meeting on Wednesday, bringing the total easing cycle to 250 basis points (bps). Investors also see a chance for another cut to 2.75% early next year, with attention on the RBNZ’s updated rate outlook. The dovish remarks from the New Zealand central bank could undermine the NZD in the near term.
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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