NZD/USD rebounds toward 0.6000 ahead of Michigan Consumer Sentiment Index
- NZD/USD rises as a softer US Dollar follows cooling US labor data, reviving dovish Fed bets.
- Markets now price two Fed rate cuts this year, starting in June and possibly another in September.
- New Zealand’s mixed jobs data dented sentiment, lifting unemployment and pushing back expectations for near-term policy tightening.
NZD/USD gains after two days of losses, trading around 0.5980 during the early European hours on Friday. Traders will watch the preliminary February US Michigan Consumer Sentiment Index, due for release later in the North American session.
The NZD/USD pair appreciates as the US Dollar (USD) softens, as recent US labor data point to a cooling job market, reviving dovish Fed expectations. Markets now price two rate cuts this year, starting in June, with another potentially in September.
The CME FedWatch tool suggests that markets are pricing in nearly a 77.3% chance that the Federal Reserve (Fed) will hold interest rates steady at its March policy meeting, with anticipation of a first rate reduction in June.
On the data front, the US Department of Labor showed on Thursday that Initial Jobless Claims rose to 231K in the week ending January 31, above estimates of 212K and the prior 209K. Meanwhile, ADP reported on Wednesday, private payrolls rose by just 22K in January, well below expectations of 48K and the previous 37K (revised from 41K).
However, the upside in the NZD/USD pair may remain capped as the New Zealand Dollar (NZD) continues to face headwinds from fading expectations of an imminent rate hike by the Reserve Bank of New Zealand (RBNZ).
A mixed New Zealand labor market report earlier this week weighed on sentiment, with unemployment unexpectedly rising to a decade high, even as employment growth exceeded forecasts. The data prompted markets to push back expectations for near-term policy tightening.
Traders are now not fully pricing in a rate increase until October, while the implied probability of a September move stands near 70%. The RBNZ’s first policy meeting under new Governor Anna Breman is scheduled for February 18 and is widely expected to result in no change to interest rates. Updated economic and rate projections will also be released at the meeting.
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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