NZD/USD retreats from weekly top, slides to 0.5730 as Fed rate hike bets support USD

NZD/USD turns lower after touching a fresh weekly high during the Asian session on Wednesday.
Inflation fears and Fed rate hike bets remain in play, limiting USD losses and capping spot prices.
Delayed RBNZ rate hike bets due to prolonged energy supply shock further weigh on the NZD.

Haresh Menghani FXStreet

The NZD/USD pair attracts some sellers following a modest Asian session rise to the 0.5760 area, or the weekly top, and stalls the previous day's recovery move from over a four-month low. Spot prices slide to the 0.730 region in the last hour and seem vulnerable to prolonging the downtrend witnessed over the past two months or so.

The optimism led by US President Donald Trump's signal that the US would wind down current hostilities with Iran within two to three weeks remains limited amid reports that the UAE is pushing for military action to reopen the Strait of Hormuz. Adding to this, the US is still deploying additional troops and assets in the Middle East, raising the risk of a broader regional conflict. This keeps inflation concerns and Federal Reserve (Fed) rate hike bets in play, which acts as a tailwind for the US Dollar (USD) and exerts some pressure on the NZD/USD pair.

Meanwhile, the New Zealand Dollar (NZD) is undermined by expectations that the Reserve Bank of New Zealand (RBNZ) could wait until Q4 before raising interest rates amid concerns that a prolonged energy supply shock would dent economic growth. Apart from this, the latest data published by RatingDog showed China's Manufacturing PMI dropped to 50.8 in March from 52.1. This counters Tuesday's upbeat official PMIs and points to a fragile recovery in the world's second-largest economy, which further weighs on antipodean currencies, including the Kiwi.

The aforementioned fundamental backdrop validates the near-term negative outlook for the NZD/USD pair, though traders might opt to wait for geopolitical developments before placing aggressive directional bets. In the meantime, Wednesday's US economic docket – featuring the release of the ADP report on private-sector employment, the monthly Retail Sales, and the ISM Manufacturing PMI – will be looked upon for some impetus. The market attention will then shift to the release of the closely-watched US Nonfarm Payrolls (NFP) report on Friday.

New Zealand Dollar FAQs

What key factors drive the New Zealand Dollar?

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.

How do decisions of the RBNZ impact the New Zealand Dollar?

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.

How does economic data influence the value of the New Zealand Dollar?

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.

How does broader risk sentiment impact the New Zealand Dollar?

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

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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