- NZD/USD retreats from a seven-week high of 0.6236, reached on Friday.
- The downside of the pair could be restrained due to the rising odds of a Fed rate cut in September.
- Fed Chair Powell stated at the Jackson Hole Symposium, "The time has come for policy to adjust.”
NZD/USD trades around 0.6210 after pulling back from a seven-month high of 0.6236, marked on Friday. However, the downside of the NZD/USD pair could be limited due to the dovish sentiment surrounding the US Federal Reserve (Fed) regarding its policy outlook.
Fed Chairman Jerome Powell stated at the Jackson Hole Symposium on Friday, "The time has come for policy to adjust." Although Powell did not specify when rate cuts would begin or their potential size, markets anticipate the US central bank will announce a 25-basis points rate cut at the September meeting.
Additionally, Philadelphia Fed President Patrick Harker stated on Friday that the US central bank's approach to interest rate adjustments needs to be "methodical," signaling that policymakers are planning a series of rate cuts throughout the remainder of 2024 as the US central bank prepares for a dovish shift, according to Bloomberg.
However, the New Zealand Dollar (NZD) could face downward pressure as markets have fully factored in additional 25 basis point cuts by the Reserve Bank of New Zealand (RBNZ) for October and November. The RBNZ has already begun its easing cycle, reducing its Official Cash Rate (OCR) to 5.25% in August.
Traders will likely watch the ANZ – Roy Morgan Consumer Confidence for August and the seasonally adjusted Building Permits (MoM) data for July later this week, as these figures could offer new insights into New Zealand's economic activity.
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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