New Zealand Dollar edges higher above 0.5850 as softer US inflation dampens Fed rate hike bets

NZD/USD drifts higher to around 0.5855 in Monday’s early European session.
Cooling US inflation curbs Fed rate hike bets.
The PBoC kept its benchmark lending rates unchanged for a 14th consecutive month on Monday, in line with expectations.

Lallalit Srijandorn FXStreet

The NZD/USD pair holds positive ground near 0.5855 during the early European session on Monday. The US Dollar (USD) weakens against the New Zealand Dollar (NZD) as softer US inflation data have led traders to cut bets on imminent rate hikes from the US Federal Reserve (Fed).

Data released last week showed that the US Consumer Price Index (CPI) inflation slowed in June, while the Producer Price ‌Index (PPI) also arrived softer than expected. Markets continue to expect no change to rates at the Fed's next meeting on July 29, with Fed funds futures pricing an implied 85.6% chance of a hold, compared to a 61.5% odds a month ago, according to the CME FedWatch tool.

Cleveland Fed President Beth Hammack said on Friday that interest rates may need to rise to beat back persistent inflation. Meanwhile, Fed Governor Christopher Waller warned that policymakers need to see "several months" of sustained cooling before taking rate hikes off the table.

Earlier Monday, the People’s Bank of China (PBOC) kept its benchmark lending rates unchanged for a 14th consecutive month, as widely expected. The one-year and five-year LPRs were at 3.00% and 3.50%, respectively.

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

Lallalit Srijandorn

FXStreet

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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