- NZD/USD receives support as RBNZ’s interest rate decision looms.
- The NZD’s upside could be limited due to safe-haven flows amid rising Middle-East tensions.
- The US Dollar receives support from diminished odds of a 50-basis point rate cut by the Fed.
NZD/USD extends its gains for the second consecutive day, trading around 0.6040 during the European session on Tuesday. Traders assess the Reserve Bank of New Zealand’s (RBNZ) policy decision scheduled for Wednesday. The central bank is widely expected to hold its current Official Cash Rate (OCR) at 5.5% for the ninth consecutive time.
The upbeat employment report from New Zealand last week, combined with improving signs of diminished demand from trade partner China, reduces the likelihood of a rate cut by the Reserve Bank of New Zealand on Wednesday.
The safe-haven flows might have put a cap on the upside of risk-sensitive currencies like the New Zealand Dollar (NZD) amid rising geopolitical tensions in the Middle East. Israeli forces pressed on with their operations near the southern Gaza city of Khan Younis on Monday. CBC News cited Palestinian medics saying Israeli military strikes on Khan Younis on Monday killed at least 18 people.
On the USD front, the US Federal Reserve (Fed) is expected to deliver a quarter-point interest rate cut at September’s meeting. Earlier, it was expected a 50 basis point rate cut in September. According to CME’s FedWatch Tool, the probability of 50 basis points (bps) cut in September has dropped to 50%, down from 85% last week.
Traders will likely focus on US Producer Price Index (PPI) data set to be released on Tuesday and Consumer Price Index (CPI) figures on Wednesday. Traders are looking for confirmation that price growth remains stable in the United States.
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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