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NZD/USD remains vulnerable near 0.5840 lows on a slightly firmer US Dollar

  • The New Zealand Dollar gives away Monday's gains and returns below 0.5850.
  • The US Dollar picks up from Monday´s lows ahead of the US flash PMIs and Fed Powell's conference.
  • Weak New Zealand data is boosting expectations of further RBNZ easing and weighing on the NZD.

The New Zealand Dollar has given away Monday’s gains against the US Dollar, retreating from the 0.5870 area to levels right above two-week lows near 0.5840, weighed by a moderate US Dollar’s recovery, ahead of US PMI data and Fed Powell’s speech.

The US Dollar took a breather on Monday after rallying more than 2% against the kiwi over the last three days. Fed speakers offered a wide range of opinions about the monetary policy path, but they failed to change the market’s view that further rate cuts are imminent.

Investors, however, are taking a more cautious stance on Tuesday, awaiting preliminary PMI figures for September and a speech on the economic outlook by Fed Chair Jerome Powell for further clues about the bank’s forward guidance.

Business activity is expected to have slowed down moderately in September, and the risk is on a sharper-than-expected slowdown, which would highlight the negative impact from tariffs and force Fed’s Powell to adopt a more dovish stance.

In New Zealand, data released last week disappointed, with the Gross Domestic Product contracting beyond expectations and the trade deficit widening. These figures have boosted speculation of further RBNZ rate cuts, which is keeping the Kiwi’s upside attempts limited.

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

Guillermo Alcala

Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.

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