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NZD/USD holds positive ground near 0.6250, US PMI data looms

  • NZD/USD trades firmer around 0.6250 in Monday’s Asian session. 
  • Traders expect the Fed to reduce interest rates further in the remainder of the year.
  • Deepening growth concerns in New Zealand’s economy might weigh on the Kiwi. 

The NZD/USD pair trades on a stronger note near 0.6245 during the early Asian session on Monday. The pair edges higher as investors digest monetary policy decisions from the US Federal Reserve’s (Fed) sharp rate cut last week.

The Fed decided to cut its benchmark interest rate by 50 basis points (bps), marking the first reduction in four years. The half-point move signals that the Fed is acting aggressively to keep the US economy from stalling. Economists believe the rate cut last week will mark the first in a series of reductions this year and into 2025. The markets expect the Fed to cut its benchmark rate again at its November and December meetings, according to FactSet. This, in turn, might continue to undermine the US Dollar (USD) and act as a tailwind for NZD/USD. 

Investors will take more cues from the preliminary US Purchasing Managers Index (PMI) data for September, which is due on Monday. The Manufacturing PMI is expected at 48.6 in September versus 47.9 in August, while the Services PMI is estimated at 55.3 in September from 55.7 in the previous reading. Also, the speeches by the Fed’s Austan Goolsbee and Raphael Bostic will be closely watched. 

On the other hand, the latest Gross Domestic Product (GDP) figures show the New Zealand economy has contracted again, falling 0.2% in the second quarter (Q2). “Ongoing headwinds, including our expectation for further weakening in the labor market, suggest we are unlikely to see a rapid turnaround in the economy,” said Kim Mundy, economist at ASB Bank in Auckland. The fragile New Zealand economic outlook is likely to cap the upside for the Kiwi in the near term. 

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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Lallalit Srijandorn

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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