New Zealand Dollar declines due to increasing risk aversion

NZD/USD loses ground as the US Dollar gains on safe-haven demand amid uncertainty surrounding the US-Iran peace agreement.
US strikes in southern Iran targeted missile launch sites and mine-deploying vessels, according to Central Command.
The RBNZ is widely expected to keep its official cash rate unchanged at 2.25% on Wednesday.

Akhtar Faruqui FXStreet

NZD/USD depreciates after registering modest gains in the previous day, trading around 0.5860 during the Asian hours on Tuesday. The pair depreciates as the US Dollar (USD) advances on rising safe-haven demand amid uncertainty surrounding the US-Iran peace agreement.

According to a Fox News report, US forces conducted self-defense strikes in southern Iran on Monday. A US Central Command spokesperson stated that the American strikes targeted missile launch sites and Iranian vessels that were attempting to deploy mines. The US military emphasized that it will continue to protect its forces while maintaining restraint during the ceasefire.

However, Bloomberg reported on Monday that the US President Donald Trump said negotiations toward a deal with Iran to end their conflict and reopen the Strait of Hormuz were "proceeding nicely.” Traders will closely monitor developments surrounding the US-Iran peace deal. Any sign of escalation in the Middle East could boost a safe-haven currency such as the Greenback and act as a headwind for the major pair.

Regarding monetary policy, the Reserve Bank of New Zealand (RBNZ) is widely expected to keep its official cash rate unchanged at 2.25% on Wednesday. However, market pricing indicates a growing likelihood of tighter policy ahead, with an implied 80% probability of a rate hike in July and a move fully priced in by September.

Hawkish expectations surrounding the RBNZ policy outlook are driven by global energy supply disruptions that have heightened inflation risks. Consequently, the central bank is anticipated to upwardly revise its projections for both inflation and the future policy rate path at its upcoming meeting.

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

Akhtar Faruqui

FXStreet

Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.

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