New Zealand Dollar approaches YTD lows amid a subdued risk appetite
- NZD/USD pares losses and retreats below 0.5600, drawing closer to the 17-month low at 0.5580.
- The US Dollar has bounced up after a weak opening with investors pondering Friday's downbeat US consumer sentiment report.
- Oil prices remain at high levels, adding pressure on New Zealand's economic growth.
The New Zealand Dollar (NZD) retraces previous gains against the US Dollar (USD) on Monday and turns negative on the daily chart, with markets cautious amid the growing tensions in the Middle East and Oil prices at high levels. The NZD/USD pair has pulled back below 0.5600, from session highs at 0.5620, drawing closer to a 17-month high at 0.5580.
The US Dollar opened the week on a modest soft tone, still weighed by the disappointment of the University of Michigan (UoM) Consumer Sentiment Index data released on Friday. The UoM report showed that consumer confidence fell to levels close to historic lows in October as the higher cost of living amid the war in Iran deteriorated economic expectations.
High Oil prices are keeping investors away from risk
Investors, however, remain wary of taking excessive risks on Monday amid news of escalating hostilities in the Gulf, which keeps Oil prices buoyed. These prices put additional pressure on New Zealand's Oil-importing economy and pose significant headwinds for sentiment-linked currencies, like the Kiwi.
A new attack on Saudi Arabia’s King Khalid International Airport by the Iran-backed Houthis has killed one person and injured 11. This strike comes after a Saudi attack on the airport of the Houthi-held Yemeni capital of Sanaa, in a tit-for-tat escalation thst threatens to lead the conflict into an all-out regional war.
Meanwhile, Iran affirmed that the US accepted most of Tehran’s conditions for a deal but that the US response was “inadequate”. Beyond that, Iran’s security chief Mohsen Rezaei accused the US and the United Arab Emirates (UAE) of running an Oil smuggling network in Hormuz. Brent Oil prices, which fell to session lows of $100.65 during the Asian Session, have retraced most losses and returned to the 102.70 area during the European morning session
The calendar is thin today, with markets partially closed in the US for Columbus Day. Cleveland Federal Reserve President Beth Hammack is scheduled to speak later in the day, but the main focus will remain on the inflation reports, due later this week, for further insight into the Fed’s tightening calendar.
In New Zealand, the Reserve Bank of New Zealand’s Governor, Anna Breman, will speak on Thursday, ahead of the release of New Zealand’s Business Purchasing Managers’ Index figures for September.
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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