New Zealand Dollar bulls seem hesitant; downside seems limited amid weak USD

NZD/USD struggles to build on an Asian session uptick, though the downside remains cushioned.
Iran diplomacy hopes and receding Fed hike bets undermine the USD, lending support to the pair.
Hawkish RBNZ expectations also warrant caution for bears ahead of the FOMC meeting this week.

Haresh Menghani FXStreet

The NZD/USD pair kicks off the new week on a positive note amid a broadly weaker US Dollar (USD), though it struggles to capitalize on gains beyond the 0.5800 mark.

The US and Iran paused following 13 straight nights of strikes, reviving hopes for a diplomatic resolution to end a five-month-old US-Iran conflict. US ambassador to the United Nations (UN) Mike Waltz said that while forces remained locked and loaded, President Donald Trump wants to give negotiations a little bit of room. This prompts traders to unwind some of the geopolitical risk premium, which, in turn, undermines the safe-haven USD and lends some support to the NZD/USD pair.

Meanwhile, the latest optimism triggers a steep decline in crude oil prices, easing inflationary fears and tempering US Federal Reserve (Fed) rate-hike expectations. This is evident from a modest pullback in US Treasury bond yields, which turns out to be another factor that drags the USD away from the vicinity of the monthly high, retested last week. Traders, however, refrain from placing aggressive bearish bets on the USD and opt to wait for the outcome of a two-day FOMC policy meeting.

The US central bank is scheduled to announce its decision on Wednesday and is universally anticipated to leave interest rates unchanged. Hence, investors will look for fresh cues about the Fed's future policy path, which will play a key role in influencing the USD price dynamics. Apart from this, developments surrounding the Middle East crisis should infuse volatility in financial markets, which should further drive the USD demand and provide some meaningful impetus to the NZD/USD pair.

In the meantime, stronger-than-expected inflation data from New Zealand reaffirmed expectations that the Reserve Bank of New Zealand (RBNZ) will deliver another rate hike at its September meeting. The hawkish outlook might continue to act as a tailwind for the New Zealand Dollar (NZD), which favors NZD/USD bulls and suggests that any corrective pullback is more likely to be bought into.

New Zealand Dollar FAQs

What key factors drive the New Zealand Dollar?

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.

How do decisions of the RBNZ impact the New Zealand Dollar?

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.

How does economic data influence the value of the New Zealand Dollar?

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.

How does broader risk sentiment impact the New Zealand Dollar?

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.

Author

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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