NZD/USD trims losses below 0.5900, investors await Fed rate decision

NZD/USD trades on a stronger note near 0.5880 in Tuesday’s Asian session.
The Fed will likely hold rates steady at its July meeting on Wednesday.
Rising speculation of an early rate cut by RBNZ and fear of Chinese economic slowdown might weigh on the Kiwi.

Lallalit Srijandorn FXStreet

The NZD/USD pair recovers some lost ground around 0.5880 during the Asian trading hours on Tuesday. However, the upside of the pair might be limited as traders prefer to wait on the sidelines ahead of the Federal Reserve (Fed) monetary policy meeting on Wednesday.

The US Fed is widely expected to hold the interest rate in the range of 5.25%-5.50% at a two-day FOMC meeting that concludes on Wednesday as Fed Chair Jerome Powell signalled that he wanted more evidence that inflation is on course to the 2% target before trimming. "The case to cut is already strong, and the Fed will likely use the July meeting to plant a seed that a cut in September is on the table," said Ryan Sweet, chief US economist at Oxford Economics.

On the Kiwi front, rising bets for an early interest rate cut by the Reserve Bank of New Zealand (RBNZ) continue to undermine the New Zealand Dollar (NZD). The financial markets anticipate the RBNZ rate cuts, with traders pricing 14 basis points (bps) of cuts in August, indicating a 55% chance of a rate cut soon.

Furthermore, the sluggish Chinese economy might cap the NZD’s upside as China is a major trading partner of New Zealand. The Chinese GDP growth rate fell short of expectations in the second quarter, as the consumer sector suffered amid labor market difficulties and a prolonged housing slowdown.

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

Lallalit Srijandorn

FXStreet

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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