NZD/USD dives to 0.6070 as RBNZ communicates dovish interest-rate outlook


  • NZD/USD plunges to near 0.6070 as the RBNZ delivers a dovish interest rate guidance.
  • The RBNZ sees inflation returning to the 1%-3% range in the second quarter this year.
  • Investors await the US inflation data for fresh cues on the rate-cut timeframe.

The NZD/USD pair slides vertically to near 0.6070 in Wednesday’s European session. The Kiwi asset faces an intense sell-off as the Reserve Bank of New Zealand (RBNZ) unexpectedly delivered a dovish guidance on interest rates with keeping the Official Cash Rate (OCR) steady at 5.5%, as expected.

The RBNZ opened doors for rate cuts amid easing consumer inflation expectations. The central bank favored for keeping the monetary policy framework restrictive but the extent of restrictiveness will be eased. Over the inflation outlook, the RBNZ sees price pressures returning in the desired range of 1%-3% in the second half of this year.

Meanwhile, the market sentiment remains firm as investors expect that the Federal Reserve (Fed) will start reducing interest rates from the September meeting. S&P 500 futures have posted decent gains in European trading hours. 10-year US Treasury yields fall to near 4.29% as Fed Chair Jerome Powell signaled in his semi-annual Congressional testimony on Tuesday that escalated inflation is not only risk for the central bank with an easing trend in job demand.

Fed Powell said, "Labor market conditions have cooled considerably compared to where they were two years ago," and added that the US “is no longer an overheated economy,” Reuters reported.

Easing US economic outlook is unfavorable for the US Dollar (USD). The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, struggles to extend recovery above 105.20.

Going forward, investors will focus on the United States (US) Consumer Price Index (CPI) data for June, which will be published on Thursday. The core CPI, which excludes volatile food and energy prices, is estimates to have grown steadily on monthly as well as annual basis.

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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