New Zealand Dollar gains momentum following strong Q2 GDP growth
- New Zealand’s Q2 GDP rose 0.2% QoQ and 2.6% YoY, boosting the NZD.
- The US Dollar soft-pedals despite a recent 25 bps Fed rate hike to 3.75%-4.00%.
- Markets price a 51% chance of another Fed rate increase in October to combat inflation.
NZD/USD halts its three-day losing streak, trading around 0.5740 during the European hours on Thursday. The pair appreciates as the New Zealand Dollar (NZD) strengthens following the release of domestic Gross Domestic Product (GDP) data for the second quarter. New Zealand’s economic activity rose 0.2% quarter-over-quarter in the June quarter, following a 0.9% rise in the March quarter. On a year-over-year basis, GDP grew 2.6% in Q2, up from a revised 1.7% increase in the previous period.
Analysts at ING highlight that the Reserve Bank of New Zealand’s September meeting delivered a “dovish surprise,” with policymakers signalling “there is only room for another 25bp to 3.0%.” ING cautions that this guidance “should not be taken as a commitment,” stressing that the policy path remains data-dependent. In particular, the bank notes that “the longer energy prices remain elevated, the higher the chances of upward revisions in policy projections by year-end,” suggesting that the current rate outlook could yet be pushed higher if cost pressures persist.
The NZD/USD pair gained further support as the US Dollar (USD) held losses despite the potential for additional policy tightening by the Federal Reserve (Fed). The Fed raised the federal funds rate by 25 basis points to a target range of 3.75% to 4.00%, matching market expectations and marking its first interest rate increase in three years, while signaling that another hike could occur before year-end.
Fed Chair Kevin Warsh explained that the rate hike was driven by inflation remaining "too high" for "too long," framing the action as a "sober" and "responsible decision" while keeping future rate increases on the table to curb price pressures. Following these comments, money markets priced in roughly a 51% probability of another Fed rate hike at the October meeting, according to the CME FedWatch tool.
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.
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.
