NZD/USD flat lines near 0.5850 on worries over Fed’s independence

NZD/USD trades flat around 0.5860 in Wednesday’s early Asian session.
Trump said he is firing Fed governor Lisa Cook, raising concerns over the Fed’s independence.
RBNZ’s dovish tone might cap the pair’s upside.

Lallalit Srijandorn FXStreet

The NZD/USD pair holds steady near 0.5860 during the early Asian session on Wednesday. Rising concerns over the Federal Reserve’s (Fed) independence could weigh on the US Dollar (USD) against the New Zealand Dollar (NZD). The preliminary reading of the US Gross Domestic Product (GDP) for the second quarter (Q2) will be in the spotlight on Thursday, ahead of the Personal Consumption Expenditures (PCE) Price Index report for July.

US President Donald Trump stated on Monday that he has fired Fed Governor Lisa Cook, the first instance of a president firing a central bank governor in the Fed’s history. On Tuesday, Trump said that he will soon have a “majority” of his nominees on the Fed board who will back his desire to slash interest rates. In response, Cook said Trump has no authority to fire her from the central bank, and she will not resign.

The unpredictable actions of the Trump administration and the prospect of a more dovish Fed could undermine the Greenback and act as a tailwind for the pair in the near term. Traders are now pricing in nearly an 85% odds for a cut of at least a quarter-point at the Fed’s September meeting, up from 75% last week, according to the CME FedWatch tool.

"President Trump is undertaking a risky and possibly ineffective battle against the Fed. To get a majority of the FOMC to toe the Trump line would take seven voters, not just two or even four," said Brian Jacobsen, chief economist at Annex Wealth Management.

On the other hand, the dovish tone from the Reserve Bank of New Zealand (RBNZ) might weigh on the Kiwi against the USD. The New Zealand central bank cut its policy rate by 25 basis points (bps) to a three-year low of 3.00% last week and signaled further reductions in coming months as policymakers warned of domestic and global headwinds to growth. RBNZ Governor Christian Hawkesby noted that the outlook is data-dependent, adding that if businesses and consumers remain cautious and need more support, that might be something that prompts more action.

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

Lallalit Srijandorn

FXStreet

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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