NZD/USD appreciates to near 0.6150 due to improved risk sentiment

NZD/USD maintains its position near the two-month high of 0.6178, marked on Wednesday.
The US Dollar receives downward pressure from the lower Treasury yields.
Retail Sales fell by 1.2% QoQ in Q2, swinging from a 0.4% growth in Q1.

Akhtar Faruqui FXStreet

NZD/USD retraces its recent gains toward two-month highs, trading around 0.6150 during the Asian session on Friday. This upside of the NZD/USD pair could be attributed to the tepid US Dollar (USD) amid improved risk sentiment. Traders assess the US Federal Reserve (Fed) Chair Jerome Powell’s speech at the Jackson Hole Symposium later in the North American session.

The decline in the US Treasury yields put pressure on the Greenback. US Dollar Index (DXY), which measures the value of the US Dollar against its six major peers, trades around 101.30. 2-year and 10-year yields on US bond coupons stand at 3.98% and 3.84%, respectively, at the time of writing.

However, the US Dollar received support from the mixed S&P Global Purchasing Managers Index (PMI) data released on Thursday. The US Composite PMI dipped slightly to 54.1 in August, a four-month low, down from 54.3 in July, yet remained above market expectations of 53.5. This suggests that US business activity continues to expand, marking 19 straight months of growth.

The S&P Global US Services PMI inched up to 55.2 in August 2024, from 55.0 in July, defying expectations of a drop to 54.0. Meanwhile, the Manufacturing PMI declined to 48.0 in August from 49.6 the previous month, falling short of market expectations of 49.6 and signaling the second consecutive contraction in US factory activity at the sharpest rate this year.

In New Zealand, Retail Sales fell by 1.2% quarter-on-quarter in the second quarter, following a downward revision to 0.4% growth in the first quarter, and exceeding market expectations of a 1.0% decline. This drop in retail activity continues the downward trend observed over the past eight quarters.

The Reserve Bank of New Zealand (RBNZ) has initiated its easing cycle, lowering its Official Cash Rate (OCR) to 5.25% in August and signaling more cuts to come. Markets have fully priced in an additional 25 basis point cuts in October and November.

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

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.

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