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New Zealand Dollar loses traction as US–Iran tensions overshadow hawkish RBNZ policy outlook

  • NZD/USD loses ground to near 0.5885 in Thursday’s early European session.
  • Iran said assets belong to Iranians and must be returned fully and unconditionally. 
  • Markets price in RBNZ’s tighter policy path as the inflation outlook worsens. 

The NZD/USD pair attracts some sellers to around 0.5885 during the early European trading hours on Thursday. The New Zealand Dollar (NZD) softens against the US Dollar (USD) as a fresh exchange of airstrikes between the United States (US) and Iran dented hopes for a peace deal. 

The US military launched new strikes overnight in Iran targeting ‌a military site and shooting down four Iranian one-way attack drones that posed a threat around the Strait of Hormuz, Reuters reported on Wednesday. Deputy Secretary of Iran's Supreme National Security Council, Ali Bagheri Kani, said that Iran is seeking the release of all of the country's funds by the US and this is the legal right of Iran, adding that the assets belong to Iranians and must be returned “fully and unconditionally.”

The Reserve Bank of New Zealand (RBNZ) decided to keep the Official Cash Rate (OCR) on hold at 2.25% at its May meeting on Wednesday. Three board members voted to raise interest rates by a quarter point while three voted to leave rates unchanged. 

RBNZ Governor Anna Breman said during the press conference that "we think OCR increases are likely at coming meetings, of course, it would depend on how the data evolves, how the outlook for inflation evolves, and also the balance of risks.” 

The hawkish stance of the New Zealand central bank could underpin the Kiwi against the USD. Markets have repriced the New Zealand rate outlook, with traders now expecting multiple hikes through early 2027.

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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