- NZD/USD drops sharply to near 0.6160 despite diminishing Fed small rate cut bets weighing on the US Dollar.
- Slower-than-expected US annual PPI boosted Fed 50 bps rate cut prospects.
- The RBNZ is expected to cut interest rates in both policy meetings in October and November this year.
The NZD/USD pair falls to near 0.6160 in Friday’s North American session. The Kiwi asset declines despite the US Dollar (USD) weakens as traders raise bets for the Federal Reserve (Fed) reducing interest rates by 50 basis points (bps) on Thursday.
The debate over the Fed’s likely interest rate cut size returns after Thursday’s United States (US) Producer Price Index (PPI) report for August showed that the annual producer inflation decelerated further.
According to the CME FedWatch tool, the probability of the Fed reducing interest rates by 50 bps to 4.75%-5.00% in September has increased sharply to 45% from 28% a day ago.
The PPI report showed that annual headline producer inflation grew by 1.7%, slower than the estimates of 1.8% and the prior release of 2.1% due to falling energy prices. The core PPI – which excludes volatile food and energy prices – rose steadily by 2.4%.
A slowdown in the pace of the price rise by producers at factory gates has also prompted the risk appetite of investors. S&P 500 futures have posted decent gains in the early New York session. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, slides below the crucial support of 101.00.
Meanwhile, the New Zealand Dollar (NZD) weakens amid growing speculation that the Reserve Bank of New Zealand (RBNZ) will cut interest rates aggressively. The RBNZ started the policy-easing cycle unexpectedly in August and is expected to reduce its Official Cash Rate (OCR) in each of its remaining policy meetings this year.
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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