New Zealand Dollar steadies as softer US bond yields keep USD on the defensive

NZD/USD bulls remain on the sidelines on the back of the RBNZ’s cautious outlook.
Retreating US bond yields keep USD on the defensive, lending support to the major.
The Fed’s hawkish stance and geopolitical risks should help limit deeper USD losses.

Haresh Menghani FXStreet

The NZD/USD pair struggles to capitalize on the previous day's modest recovery gains and edges lower during the Asian session on Friday. Spot prices, however, hold above the lowest level since July 9, touched on Wednesday, and currently trade around the 0.5730 region, nearly unchanged for the day.

The Reserve Bank of New Zealand's (RBNZ) cautious stance counters the better-than-expected domestic GDP report published on Thursday and is seen as a key factor behind the New Zealand Dollar's (NZD) relative underperformance. Meanwhile, the US Dollar (USD) struggles to lure buyers as US bond yields retreat further from multi-year highs amid receding fears of runaway inflation due to a modest pullback in crude oil prices. The combination of diverging forces, in turn, holds back bearish traders from placing aggressive bets and acts as a tailwind for the NZD/USD pair.

The downside for the USD, however, seems limited on the back of the Federal Reserve's (Fed) hawkish outlook. In fact, the US central bank raised interest rates for the first time in over three years at the conclusion of the September meeting on Wednesday. Moreover, the so-called dot plot revealed that Fed officials expect one more interest rate increase this year. Adding to this, oil-driven inflation fears underpin prospects for further Fed tightening, which, along with persistent geopolitical uncertainties, act as a tailwind for the safe-haven buck and should cap the NZD/USD pair.

Traders now look forward to Friday's second-tier US macro data – Industrial Production and Capacity Utilization Rate. Apart from this, speeches from influential FOMC members and further developments surrounding the Middle East crisis will drive the USD, providing some impetus to the NZD/USD pair. Nevertheless, spot prices remain on track to register heavy losses for the fourth straight week. Moreover, the aforementioned fundamental backdrop seems tilted in favor of USD bulls, suggesting that any meaningful recovery attempt is more likely to be sold into.

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

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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