NZD/USD holds positive ground above 0.5850 amid Fed uncertainty
- NZD/USD trades with mild gains around 0.5855 in Wednesday’s Asian session.
- Fed’s Powell said the outlook for the labor market and inflation faces risks.
- The Reserve Bank of New Zealand names Anna Breman as new governor.
The NZD/USD pair recovers some lost ground near 0.5855 during the Asian session on Wednesday. The US Dollar (USD) weakens against the New Zealand Dollar (NZD) as traders continue to digest different comments from Federal Reserve (Fed) policymakers, while key gauges of US business activity disappointed investors somewhat.
Fed Chair Jerome Powell said on Tuesday that the outlook for the labor market and inflation faces risks. Powell further stated that policymakers likely have a difficult road ahead as they weigh further interest-rate cuts.
Powell offered no hints on whether he might support a rate reduction at the Fed’s next meeting. Money markets are currently pricing in nearly a 90% possibility of a Fed rate cut in October, down slightly from 92% a day earlier, according to the CME FedWatch tool.
US business activity lost momentum in September, according to the flash reading of S&P Global’s Composite PMI, which declined to 53.6 from 54.6 in August. This, in turn, weighs on the Greenback and creates a tailwind for the pair. Meanwhile, the Manufacturing PMI eased to 52.0 in September from 53.0 in the previous reading. The Services PMI dropped to 53.9 during the same period versus 54.5 prior.
On the Kiwi front, New Zealand’s Finance Minister Willis on Wednesday appointed Anna Breman as the new governor of the Reserve Bank of New Zealand (RBNZ). Breman has been appointed for five years, and she will start her new role on December 1.
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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