NZD/USD posts modest gains above 0.5700 as Fed rate cut bets grow
- NZD/USD trades on a stronger note near 0.5730 in Tuesday’s early European session.
- Traders are pricing in approximately 87% odds of a 25 bps rate cut at the December meeting.
- RBNZ policymakers signaled an end to the easing cycle.
The NZD/USD pair gains traction to around 0.5730 during the early European session on Tuesday. The US Dollar (USD) edges lower against the New Zealand Dollar (NZD) amid imminent bets for another rate cut by the Federal Reserve (Fed) this month.
Expectations that the US Federal Reserve (Fed) will again lower interest rates at the central bank’s final policy meeting of the year next week drag the Greenback lower and create a tailwind for the pair. According to the CME FedWatch Tool, interest rate futures traders are pricing in a nearly 88% probability of a quarter percentage point cut in the fed funds rate by the Fed next week, to 3.50%-3.75%, up from just 63% a month ago.
The Reserve Bank of New Zealand (RBNZ) cut its benchmark official cash rate by 25 basis points (bps) to 2.25% last week. However, policymakers signalled an end to the easing cycle as the economy showed early signs of recovery. This, in turn, provides some support to the NZD against the USD.
“Future moves in the OCR will depend on how the outlook for medium-term inflation and the economy evolves,” the RBNZ said in its monetary policy statement.
Traders await China’s RatingDog Services Purchasing Managers Index (PMI) data on Wednesday, which is estimated to ease to 52.0 in November from 52.6 in October. If the report comes in weaker than the expectation, this could weigh on the China-proxy Kiwi, as China is a major trading partner for New Zealand.
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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