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New Zealand Dollar edges higher despite Iran conflict risks

  • NZD/USD drifts higher to near 0.5800 in Thursday’s Asian session. 
  • Trump vowed even more attacks if no peace deal is secured.
  • Hot inflation keeps traders on edge about the US rate outlook.

The NZD/USD pair gains traction to around 0.5800 during the Asian trading hours on Thursday. Nonetheless, escalating tensions in the Middle East could weigh on the New Zealand Dollar (NZD) as a riskier asset against the US Dollar (USD). The US Producer Price Index (PPI) report.

Iran’s joint military command said that its armed forces will give a "crushing and decisive” response to any “aggression” from the US in the region. Earlier, US President Donald Trump vowed to strike Iran again and scolded the country for delaying talks on an interim peace deal, following overnight attacks that put further strain on a fragile truce.

Bahrain, Jordan and Kuwait reportedly intercepted Iranian missiles and drones aimed at US military facilities on Thursday, per Reuters. Fears of wider conflict in the region could boost the Greenback as a safe-haven currency.

US inflation accelerated in May to the fastest pace in more than three years as the Iran war pushed up energy prices. The US Bureau of Labor Statistics (BLS) revealed on Wednesday that the US Consumer Price Index (CPI) rose 4.2% YoY in May, versus 3.8% prior. This figure came in line with the market expectation. Following the hot inflation report, market expectations have aggressively pivoted away from any remaining hope for rate cuts this year. 

Traders have fully priced in a 25-basis-point (bps) hike in December, a sharp turn from expectations of two rate cuts this year before the Iran war erupted at the end of February.

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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Lallalit Srijandorn

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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