- The NZD/USD has appreciated as the Fed's Beige Book indicated minimal changes in economic activity across nearly all districts.
- The US Dollar Index trades just below its recent high of 104.57, marking its strongest point since late July.
- The New Zealand Dollar may struggle due to the rising likelihood of another rate cut in November by the RBNZ.
NZD/USD gains ground as the US Dollar (USD) faced downward pressure following the release of the Federal Reserve’s (Fed) Beige Book on Wednesday. The latest report indicated that economic activity was "little changed in nearly all Districts," in contrast to August's report, where three Districts reported growth and nine showed flat activity. The pair trades around 0.6010 during the Asian session on Thursday.
The US Dollar weakened slightly, driven by a modest dip in US Treasury yields. 2-year and 10-year yields on US Treasury bonds stand at 4.07% and 4.23%, respectively, at the time of writing. However, The US Dollar Index (DXY), which tracks the US Dollar’s (USD) value against six major currencies, surged to its highest level since late July, reaching 104.57 on Wednesday.
Signs of economic resilience and rising inflation concerns have lessened the chances of a significant rate cut by the Federal Reserve in November. According to the CME FedWatch Tool, there is an 88.9% probability of a 25-basis-point rate cut, with no expectation of a larger 50-basis-point cut.
Traders are likely to keep an eye on the S&P Global Purchasing Managers Index (PMI), a leading indicator gauging US private-business activity in the manufacturing and services sector, which is set to be released on Thursday.
However, the upside of the New Zealand Dollar (NZD) could be limited due to rising odds of another rate cut in November by the Reserve Bank of New Zealand (RBNZ), with inflation easing and economic output remaining sluggish.
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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