NZD/USD gains ground above 0.5700 on Fed’s dovish remarks
- NZD/USD gains traction around 0.5730 in Friday’s early Asian session.
- US federal shutdown will extend into next week as the Senate failed to advance the GOP funding bill for a tenth time.
- Rising US-China trade tensions might cap the pair’s upside.
The NZD/USD pair trades in positive territory near 0.5730 during the early Asian session on Friday. The ongoing US government shutdown and expectations of US interest rate cuts drag the US Dollar (USD) lower against the New Zealand Dollar (NZD). Traders will assess remarks from Federal Reserve (Fed) officials.
The US federal shutdown will extend into next week as the Senate failed to advance a Republican bill to extend government funding and end the shutdown for a tenth time on Thursday, the 16th day of the impasse. Fears of a prolonged shutdown could undermine the Greenback and create a tailwind for the pair.
Furthermore, dovish remarks from Fed policymakers also weigh on the USD. Fed Governor Christopher Waller said on Thursday that he favors another interest rate reduction at the upcoming policy meeting later this month. Meanwhile, the Fed's newest governor, Stephen Miran, again made his case for a more aggressive rate cut path than the one favored by his colleagues for 2025
Traders are currently pricing in nearly a 98% chance of a 25 basis points (bps) Fed rate cut in October, followed by another reduction in December, which is fully priced in, according to Reuters.
On the other hand, escalating US-China trade tension might cap the upside for the China-proxy Kiwi, as China is a major trading partner for New Zealand. Both countries will impose additional port fees on ships carrying cargo between them. This measure will likely raise trading costs and disrupt freight flows.
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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