New Zealand Dollar advances as US Dollar struggles on softening hawkish expectations
- NZD/USD rises as the US Dollar weakens amid shifting Fed policy outlook.
- Fed Governor Waller favored keeping interest rates unchanged in September, provided upcoming inflation figures remain stable.
- The RBNZ delivered its second consecutive interest rate hike earlier this week.
NZD/USD gains ground for the second successive day, trading around 0.5900 during the Asian hours on Friday. The pair appreciates as the US Dollar (USD) struggles amid softening hawkish expectations surrounding the Federal Reserve's (Fed) monetary policy path. Fed Governor Christopher Waller recently signaled a preference for holding interest rates steady at the upcoming September meeting, assuming upcoming inflation figures offer no major shocks.
Fed Waller’s dovish tone contrasts sharply with the hawkish remarks delivered by Chairman Kevin Warsh a week earlier. Following Waller’s comments, market pricing shifted noticeably, with the CME FedWatch tool showing the probability of a September rate hike falling to 50.4%, down from 63.2% the previous day.
Traders are now turning their attention to the upcoming US August employment report for clearer guidance on the Fed's next moves. Consensus estimates project Nonfarm Payrolls to expand by 56,000 jobs, with the national Unemployment Rate expected to hold firm at 4.1%.
The Reserve Bank of New Zealand (RBNZ) implemented its second consecutive interest rate hike earlier this week. However, the central bank signaled a less aggressive approach toward future monetary tightening.
New Zealand trade rebound underpins mixed Kiwi outlook
BNY’s Geoff Yu points out that New Zealand’s external accounts are showing a solid rebound in activity, noting that June-quarter international trade data recorded “two-way trade rising 16% y/y to NZ$64.9bn.” According to BNY, this improvement was broad-based, with “total exports of goods and services increased to NZ$32.5bn from NZ$28.5bn a year earlier, while imports rose to NZ$32.4bn from NZ$27.5bn.” Yu frames these figures as evidence of robust trade flows that help offset softer merchandise terms of trade and a weaker commodity price backdrop, leaving the fundamental picture for the Kiwi more nuanced than headline growth alone might suggest.
RBNZ Assistant Governor Karen Silk noted that policymakers are more inclined to postpone the next rate increase until December, emphasizing that the central bank remains flexible and is not following a predetermined path. Financial markets currently reflect a modest 31% probability of an October rate hike, whereas a December increase is almost fully priced in by investors.
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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