New Zealand Dollar rallies as RBNZ's Conway fuels rate hike bets
- NZD/USD catches fresh bids on Tuesday in reaction to RBNZ Conway's hawkish remarks.
- Iran risks and Fed-hike bets underpin the USD, though it does little to influence the pair.
- Traders look to the US CPI report and Fed Chair Warsh’s testimony for a fresh impetus.
The NZD/USD pair attracts some dip-buyers during the Asian session on Tuesday, stalling the previous day's retracement slide from the vicinity of the 0.5800 mark or the monthly peak touched last week. Spot prices climb to the 0.5780 area in the last hour in the wake of Reserve Bank of New Zealand (RBNZ) Chief Economist Paul Conway's hawkish remarks.
In fact, Conway said that New Zealand inflation may not slow as quickly as the central bank forecasts, raising the prospect of further policy tightening following the first rate increase in three years on July 8. In fact, markets are pricing in nearly 50 basis points (bps) of additional rate hikes over the next year, which, in turn, provides a goodish lift to the New Zealand Dollar (NZD). Meanwhile, the NZD/USD pair seems unaffected by a broadly firmer US Dollar (USD).
The USD Index (DXY), which tracks the Greenback against a basket of currencies, hits a one-and-a-half-week top in the wake of escalating US-Iran tensions and US Federal Reserve (Fed) rate-hike bets. The US military launched a third consecutive night of strikes against Iran after President Donald Trump on Monday notified Congress that he was resuming hostilities and reimposed a blockade of Iranian ports. In response, Iran claimed that it attacked US military sites in Kuwait.
Moreover, Iranian missiles struck two UAE tankers in Omani territorial waters in the Strait of Hormuz after announcing the closure of the strategic waterway over the weekend. This, in turn, triggers a sharp rise in Crude Oil prices and reignites inflation fears, bolstering expectations that the US central bank will raise borrowing costs by the end of this year. The outlook favors the USD bulls, though it fails to hinder the NZD/USD pair's strong intraday move up.
Traders now look forward to the release of the latest US consumer inflation figures, due later during the North American session. Apart from this, Fed Chair Kevin Warsh's congressional testimony will be scrutinized for more cues about the future policy path, which, in turn, will play a key role in influencing the USD price dynamics. Nevertheless, the fundamental backdrop suggests that the path of least resistance for the NZD/USD pair remains to the upside.
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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