New Zealand Dollar drifts lower as traders await progress on US-Iran peace deal

NZD/USD drifts lower to around 0.5870 in Friday’s early European session.
Traders will closely monitor signs of progress amid efforts to reach a US-Iran peace deal.
RBNZ is anticipated to hold rates at 2.25% at its May meeting next Wednesday.

Lallalit Srijandorn FXStreet

The NZD/USD pair loses ground to near 0.5870 during the early European trading hours on Friday. Ongoing geopolitical tensions in the Middle East and uncertainty surrounding the US-Iran peace deal continue to boost a safe-haven currency such as the US Dollar (USD) against the New Zealand Dollar (NZD).

Negotiations between the US and Iran are ongoing, with the two sides exchanging messages and draft texts in an effort to establish a formal framework for an agreement to end the conflict. However, significant challenges remain despite Pakistan mediating US-Iran talks.

Iranian officials said on Friday that no deal has been reached with Washington, but gaps have been narrowed. Nonetheless, the Islamic Republic’s Supreme Leader, Mojtaba Khamenei, stated that Iran’s uranium enrichment and Tehran’s control over the Strait of Hormuz remain among the sticking points.

Concerns over sticky inflation data fuel expectations that the US Federal Reserve (Fed) may maintain high interest rates or consider additional hikes. This, in turn, might contribute to the Greenback’s upside and create a headwind for the pair. Markets are pricing in a 41.9% probability that the Fed will raise interest rates by 25 basis points (bps) by year-end, according to the CME FedWatch tool.

On the Kiwi front, the Reserve Bank of New Zealand (RBNZ) is expected to hold its key policy rate steady next Wednesday, but a slim majority of economists in a Reuters poll now project one ‌or more hikes by the end of September as a global energy shock threatens to lift inflation expectations.

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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