NZD/USD remains above 0.5900 on dovish Fed outlook, awaits upcoming RBNZ decision
- NZD/USD appreciates as the US Dollar struggles amid dovish sentiment surrounding the Fed outlook.
- CME’s FedWatch tool indicates a pricing in 84% probability of a 25 basis point Fed rate cut in September.
- The RBNZ is expected to deliver a 25 basis point rate cut on Wednesday.
NZD/USD edges higher after recovering its recent losses registered in the previous session, trading around 0.5930 during the early European hours on Tuesday. The pair appreciates as the US Dollar (USD) loses ground, as recent US economic data keeps intact the dovish tone surrounding the US Federal Reserve’s (Fed) policy outlook.
CME’s FedWatch tool suggests that markets are pricing in 84% odds of a 25 basis point Fed rate cut in September. Meanwhile, attention now shifts to the Federal Reserve’s annual Jackson Hole symposium later this week, where global policymakers will discuss labor market dynamics and the outlook for monetary policy. Fed Chair Jerome Powell is scheduled to deliver remarks on the economy and the central bank’s policy stance.
The risk-sensitive NZD/USD pair gains ground amid improved market sentiment, driven by positive signals toward a possible resolution of the Ukraine-Russia war. US President Donald Trump and Ukrainian President Volodymyr Zelenskyy both hoped that Monday’s gathering would eventually lead to three-way talks with Russian President Vladimir Putin.
President Trump posted on social media, saying that he had spoken with the Russian leader and begun arranging a meeting between Putin and Zelenskyy, to be followed by a trilateral summit with all three presidents. Trump told European leaders that Putin had suggested this sequence. While the Kremlin has not publicly confirmed its agreement, a senior Trump administration official said the Putin-Zelenskyy meeting could be held in Hungary, per Reuters.
The New Zealand Dollar (NZD) may face challenges ahead of the Reserve Bank of New Zealand’s (RBNZ) interest rate decision on Wednesday. Markets have priced in a 25 basis point rate cut to 3%, which could be attributed to weak domestic growth.
On the data front, the New Zealand Producer Price Index – Input by 0.6% quarter-on-quarter in the second quarter. The reading came below the expected 1.4% increase and a 2.9% gain prior. Meanwhile, Producer Price Index – Output increased by 0.6% for the same period, slowing from the previous rise of 2.1% and falling short of 1.0% expected increase.
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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