- NZD/USD depreciates due to increased risk aversion ahead of the release of ISM Manufacturing PMI.
- Fed Chair Jerome Powell stated that a rate cut in September is "on the table."
- The Kiwi Dollar may struggle as the latest inflation data raises expectations of an RBNZ’s rate cut by October.
NZD/USD retraces its two days of gains, trading around 0.5940 during the European session on Thursday. This decline is attributed to the improved US Dollar (USD) due to a recovery in US Treasury yields. Traders adopt caution ahead of ISM Manufacturing PMI and weekly Initial Jobless Claims from the United States (US), both set to be released later in the North American session.
However, the downside of the NZD/USD pair could be restrained as the US Dollar may face challenges due to the dovish sentiment surrounding the Federal Reserve’s (Fed) policy trajectory. At Wednesday’s policy meeting, the Fed decided to keep rates unchanged in the 5.25%-5.50% range.
Additionally, Federal Reserve Chairman Jerome Powell stated that a rate cut in September is "on the table," during a press conference. Powell added that the central bank will closely monitor the labor market and remain vigilant for signs of a potential sharp downturn, per Reuters.
However, the Federal Open Market Committee (FOMC) did not want to commit to anything in the statement. FOMC indicated in its statement that it does not foresee cutting rates until it has greater confidence that inflation is sustainably heading toward 2%. They require more progress on inflation before considering a cut in September unless a significant decline in the labor market begins to outweigh the slow progress on inflation.
Regarding the New Zealand Dollar (NZD), recent data from China, a close trade partner, showed that the Caixin Manufacturing Purchasing Managers' Index (PMI) for July came in at 49.8, missing the expected 51.5 and the previous reading of 51.8. This underperformance might have put pressure on the New Zealand Dollar (NZD).
Additionally, the NZD faces further pressure from expectations of an early interest rate cut by the Reserve Bank of New Zealand (RBNZ). This comes after data showed that the domestic annual CPI rate fell to its lowest level in three years for the June quarter. The RBNZ’s next policy meeting is scheduled for August 14, with markets currently pricing in a 36% chance of a rate cut and fully anticipating a move by October.
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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