- NZD/USD softens around 0.6220 in Friday’s Asian session.
- The pessimistic New Zealand growth outlook and cautious mood weigh on the Kiwi.
- Traders will keep an eye on the US employment data for August on Friday.
The NZD/USD pair trades with mild losses near 0.6220 during the Asian session on Friday. The cautious mood ahead of the key US employment data might provide some support to the US Dollar (USD). The US August Nonfarm Payrolls (NFP) will take center stage on Friday.
NZIER forecasts New Zealand’s Gross Domestic Product (GDP) growth to remain weak over the coming year, contributing to a further reduction in inflation. The Reserve Bank of New Zealand (RBNZ) is expected to cut another interest rate in October amid the expectation that inflation will fall within the target band by year’s end. This, in turn, might undermine the Kiwi.
Furthermore, the renewed concerns about the economic slowdown in China and the cautious sentiment weigh on riskier assets like the New Zealand Dollar (NZD). Bank of America Global Research analysts cut China’s GDP forecasts from 5.0% to 4.8%.
On the USD’s front, markets expect the US Federal Reserve (Fed) to start easing its monetary policy in September. The markets are now pricing in nearly 59% odds of a 25 basis points (bps) rate cut by the Fed in September, while the chance of a 50 bps reduction stands at 41%, according to the CME FedWatch tool.
All eyes will be on the US employment data for August, which is due on Friday. A disappointing outcome could prompt the market to price in a 50 basis points (bps) rate cut in September. The Greenback might face further selling pressure amid heightened expectations of Fed rate cuts.
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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