NZD/USD flattens around 0.5650 as investors await Fed Powell’s testimony
- NZD/USD trades sideways around 0.5650 ahead of Fed Chair Powell’s testimony.
- Fed Powell is unlikely to provide a timeline for the central bank's resume of its policy-easing cycle.
- The RBNZ is expected to continue reducing interest rates due to the weak labor market.
The NZD/USD pair trades flat around 0.5650 in the North American session on Tuesday. The Kiwi pair exhibits indecisiveness, with investors focusing on the Federal Reserve (Fed) Chair Jerome Powell’s testimony at the Capitol Hill at 15:00 GMT.
Ahead of Fed Powell’s testimony, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades subduedly around 108.30.
Investors await Fed Powell’s speech to get cues about the monetary policy outlook. The Fed left its interest rates in the range of 4.25%-4.50% in the January policy meeting, and Powell guided that monetary policy adjustments would be appropriate only when officials would see “real progress in inflation and at least some weakness in the labor market.
Market participants would also like to know the impact of 25% tariffs on imports of steel and aluminum, imposed by United States (US) President Donald Trump on Monday, on the inflation outlook. Market experts believe that Trump’s international agenda will be inflationary for the economy.
This week, the New Zealand Dollar (NZD) will be guided by market expectations for the Reserve Bank of New Zealand’s (RBNZ) interest rate decision on February 19 due to the light economic calendar. The RBNZ has already reduced its Official Cash Rate (OCR) by 125 basis points (bps) to 4.25% and investors expect the central bank to continue easing the monetary policy further due to weakness in the job market.
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.
Author
Sagar Dua
FXStreet
Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.
