New Zealand Dollar gains on hawkish RBNZ policy outlook
- NZD/USD appreciates as traders firmly expect the RBNZ to hike interest rates next month.
- Softer July manufacturing data raises questions about the extent of future policy tightening.
- CME FedWatch shows September Fed rate hike probability dropping from 40% to 34.8%.
NZD/USD gains ground after four days of losses, trading around 0.5870 during the early European hours on Friday. The pair appreciates as the New Zealand Dollar (NZD) receives support from traders continuing to price in a Reserve Bank of New Zealand (RBNZ) rate hike next month. The RBNZ has repeatedly stressed the need to withdraw some of its policy support, keeping market expectations for another rate increase firmly in place.
However, soft economic data released this week has raised fresh questions regarding the extent to which the RBNZ can continue tightening its monetary policy. For instance, the Business NZ Performance of Manufacturing Index fell to 54.3 in July from an upwardly revised 60.1 in June. While this still marks the 21st consecutive month of expansion and remains well above the long-term average of 52.5, the slowdown highlights emerging uncertainties for the economy.
NZD inflation expectations seen reinforcing RBNZ credibility
Brown Brothers Harriman’s Elias Haddad highlights that the latest RBNZ survey shows inflation expectations “remain close to the RBNZ 2% target midpoint for inflation, underscoring the bank’s credibility.” He notes that this anchoring of expectations around the midpoint is an important signal for policymakers as they assess the outlook for the Kiwi and the appropriate stance of RBNZ policy.
The US Dollar (USD) declines as market attention is now turning toward the upcoming United States (US) July Retail Sales data scheduled for release later in the day. Meanwhile, the Greenback faces downward pressure following a softer-than-expected US inflation report that has weighed on investor sentiment.
The Bureau of Labor Statistics reported that US wholesale costs for goods and services were flat in July. This came in below the anticipated 0.2% growth and followed a revised 0.1% decline in June. Excluding volatile food and energy components, the core Producer Price Index (PPI) rose 0.2%, slightly under market consensus expectations of 0.3%. On an annual basis, headline PPI climbed 4.7% year-over-year in July, while core PPI increased by 4.2% over the same period.
These cooling inflation metrics have notably shifted expectations regarding Federal Reserve monetary policy. According to the CME FedWatch Tool, markets are now pricing in a 34.8% probability of a US rate hike at the upcoming September meeting, down from 40% immediately following the PPI data release.
Technical Analysis: NZD/USD rises amid bullish momentum
In the daily chart, NZD/USD trades at 0.5870. The pair holds above both the 50-day exponential moving average (EMA) at 0.5823 and the 9-day EMA at 0.5865, hinting at a constructive near-term bias while it consolidates just over the shorter average. The Relative Strength Index (14) at 56.6 stays in positive territory without being overbought, suggesting bullish momentum is present but not stretched, even as the latest Fed Sentiment Index reading around 134.6 reflects softer US policy expectations that tend to favor the kiwi.
On the topside, initial resistance appears at 0.5995, ahead of a higher barrier at 0.6094 that marks a more significant cap for any continuation of the recovery. On the downside, immediate support is provided by the 9-day EMA at 0.5865, followed by the 50-day EMA at 0.5823; a deeper pullback would expose the next structural floors at 0.5580 and 0.5486.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
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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