NZD/USD rises to near 0.5900 due to improved risk-on sentiment ahead of Fed decision

NZD/USD rebounds from a three-month low at 0.5857 recorded on Monday.
The US Dollar may struggle due to dovish sentiment surrounding the Fed’s policy decision.
The New Zealand Dollar faced challenges due to the disappointing economic outlook in China.

Akhtar Faruqui FXStreet

NZD/USD trades higher around 0.5900 during the early European hours on Tuesday. The New Zealand Dollar (NZD) rebounded against the US Dollar (USD) after hitting a three-month low at 0.5857 on Monday.

The NZD/USD pair might appreciate further as the US Federal Reserve (Fed) is expected to keep rates unchanged on Wednesday. However, traders anticipate a Fed rate cut in September, with the CME FedWatch Tool indicating a 100% probability of at least a quarter percentage point cut.

Additionally, signs of cooling inflation and easing labor market conditions in the United States have fueled expectations of three rate cuts by the Fed this year. However, last week, Bank of America indicated that strong economic growth in the United States allows the Federal Open Market Committee (FOMC) to "afford to wait" before making any changes. The bank states that the economy "remains on robust footing" and continues to expect the Fed to start cutting rates in December.

Traders are also anticipating key US data this week. Nonfarm Payrolls are expected to increase by 175,000 jobs in July, down from 206,000 in June. The Unemployment Rate is projected to remain steady at 4.1%, matching 2021 highs. Additionally, Average Hourly Earnings are forecasted to rise by 0.3% month-over-month.

On the Kiwi front, disappointing GDP figures in China and an unexpected rate cut by the People's Bank of China (PBOC) last week have added further selling pressure on the antipodean New Zealand Dollar (NZD), as New Zealand and China are close trade partners. Any changes in the Chinese economy could impact the Kiwi market.

However, rising bets for an early interest rate cut by the Reserve Bank of New Zealand (RBNZ) next week continue to weigh on the Kiwi Dollar. Markets are pricing in a 44% chance of a rate cut at the central bank’s August meeting.

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

Akhtar Faruqui

FXStreet

Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.

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