NZD/USD weakens below 0.5850 on dovish RBNZ cut
- NZD/USD softens to around 0.5825 in Thursday’s early Asian session.
- Fed Minutes showed most officials saw inflation as a greater risk.
- RBNZ cut its benchmark cash rate by 25 bps to a three-year low of 3.0% on Wednesday.
The NZD/USD pair loses ground near 0.5815 during the early Asian session on Thursday. The New Zealand Dollar (NZD) weakens against the US Dollar (USD) after the Reserve Bank of New Zealand (RBNZ) delivered a rate cut and left the door open for further moves lower. Traders await the preliminary reading of the US S&P Global Purchasing Managers Index (PMI) reports for August, which are due later on Thursday.
The minutes from the Federal Reserve’s (Fed) July 29-30 meeting showed that almost all participants at the Fed viewed it as appropriate to maintain the benchmark interest rate in the 4.25%–4.50% range. Policymakers noted that it would take time to have more clarity on the magnitude and persistence of higher tariffs’ effects on inflation.
Most Fed officials also emphasized inflation risks as outweighing concerns over the labor market at their meeting last month. Investors brace for the Fed’s annual Jackson Hole symposium on Friday to see whether Fed Chair Jerome Powell will push back against market expectations for a rate cut at the September meeting.
Any surprise dovish remarks from Fed officials could undermine the Greenback and create a tailwind for the pair. Fed funds futures traders are currently pricing in an 83% chance of a cut next month and 54 basis points (bps) of cuts by year-end, according to the CME FedWatch tool.
As widely expected, the RBNZ cut its Official Cash Rate (OCR) by 25 bps to a three-year low of 3.0% at its August meeting on Wednesday. The New Zealand central bank noted the economy had stalled in the past few months, with households and businesses cautious due to rising prices, a soft labor market, and global uncertainty.
The Monetary Policy Committee (MPC) said there is scope to lower the OCR further, which might weigh on the Kiwi against the USD. RBNZ governor Christian Hawkesby said that further data on New Zealand's economic recovery will determine the RBNZ's next steps.
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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