NZD/USD declines below 0.5650 as RBNZ is expected to deliver its final 25 bps rate cut
- NZD/USD softens to around 0.5645 in Wednesday’s early Asian session.
- RBNZ is anticipated to cut the OCR by 25 bps to 2.25% at its upcoming meeting next week.
- Traders brace for the delayed US September employment report on Thursday for clues on possible Fed action.
The NZD/USD pair trades in negative territory near 0.5645 during the early Asian session on Wednesday. The New Zealand Dollar (NZD) weakens against the Greenback amid the imminent rate cut from the Reserve Bank of New Zealand (RBNZ). Traders will keep an eye on the FOMC Minutes later on Wednesday.
The RBNZ decided to reduce its Official Cash Rate (OCR) by an outsized 50 basis points (bps) to 2.5% in its October meeting, citing a slowing economy and confidence that inflation is under control. Data on Monday showed expectations that the RBNZ will cut its OCR by 25 bps to 2.25% next week and keep the door open for further cuts.
Many economists, including those at Westpac, BNZ, ASB, and ANZ, also anticipated a further 25 bps reduction at the November meeting. The prospect of an RBNZ rate cut could undermine the Kiwi against the USD in the near term.
Traders will closely monitor the delayed reports for signs of labor market health. The release of the US September NFP data will take center stage on Thursday. Market consensus was for 50,000 jobs added in September and an Unemployment Rate of 4.3% during the same period.
In case of a weaker-than-expected outcome, this could drag the USD lower and create a tailwind for the pair. According to the CME FedWatch tool, money markets are pricing in the probability of a 25 bps rate cut in the December meeting at around 46%, down from around 60% last week.
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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