NZD/USD holds positive ground above 0.5650 on weaker US Dollar, lower US bond yields
- NZD/USD gains ground to near 0.5680 in Friday’s early Asian session.
- US PPI inflation rose at a stronger pace than expected in January.
- The RBNZ is expected to cut its OCR by 50 bps to 3.75% next week.
The NZD/USD pair trades stronger to around 0.5680 during the early Asian session on Friday. The US Dollar (USD) weakens amid declining US yields across the curve and despite steady concerns over a global trade war. Later on Friday, the US Retail Sales will take center stage.
The US Producer Price Index (PPI) increased in January, triggering the expectation that the US Federal Reserve (Fed) would not be cutting interest rates before the second half of the year. Financial markets have pushed back rate cut bets to September from June, though some economists believe the window for additional policy easing has closed due to solid domestic demand and a steady labor market.
"The Q1 RBNZ survey of inflation expectations leaves plenty of room for the RBNZ to deliver a 50bps cut to 3.75% next week. Firms’ inflation expectations ns 2, 5 and 10 years out all dipped closer to 2%,” said BBH's FX analysts.
The Reserve Bank of New Zealand (RBNZ) is expected to cut interest rates by 50 basis points (bps) next week, bringing its Official Cash Rate (OCR) to 3.75%. The markets also anticipate a further 75 bps of reduction this year. The dovish expectation from the RBNZ might drag the Kiwi lower against the USD.
(This story was corrected on February 14 at 09:25 GMT to say, at the first bullet point, that NZD/USD gains ground in Friday’s session, not Thursday.)
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.
