NZD/USD holds above 0.5950 as US recession fears mount
- NZD/USD rebounds to near 0.5955 in Tuesday’s early Asian session.
- Traders raise pressure on the Fed to take more aggressive rate action.
- The interest rate cut by the RBNZ in August cannot be ruled out, said BNZ analysts.
The NZD/USD pair recovers some lost ground around 0.5955 after retracing to near 0.5850 during the early Asian session on Tuesday. The softer US Dollar (USD) broadly provides some support to the pair. The risk sentiment might influence the markets amid concerns over the likelihood that the US economy might tip into recession.
Data released on Monday revealed that the US ISM Service Purchasing Managers Index (PMI) surprised to the upside and returned to the expansion zone, rising to 51.4 in July from 48.8 in June. This figure came in better than the estimation of 51.0. However, the S&P Global Composite PMI was worse than expected, declining to 54.3 in July versus 55 prior. A series of disappointing US economic data fuelled the fear of a looming US recession, which triggered the sell-off across the financial markets.
The Federal Reserve (Fed) kept interest rates at 5.25% to 5.5% after its July meeting last week. Traders are now raising bets on emergency rate cuts. JPMorgan chief economist Michael Feroli noted that there is a "strong case to act before the next scheduled policy meeting on September 17-18. The markets are now pricing in nearly 85% chance that the Fed will cut the rate by 50 basis points (bps) in September, up from only 11.5% last week, according to the CME FedWatch Tool. This, in turn, exerts some selling pressure on the Greenback broadly and creates a tailwind for the NZD/USD pair.
On the Kiwi front, BNZ analysts said that while they see the first Official Cash Rate (OCR) cut by the Reserve Bank of New Zealand (RBNZ) in November, they reiterated that they wouldn’t rule out an earlier start to OCR cuts, including at the Bank’s August meeting, which they see as live.
Traders will monitor the release of the Chinese July Consumer Price Index (CPI) on Friday for fresh impetus, which is estimated to show an increase of 0.4% YoY in July. The weaker-than-expected reading or any signs of an economic slowdown in China could undermine the Kiwi as China is a major trading partner of New Zealand.
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
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.
