NZD/USD drifts higher above 0.6200 on dovish Fed remarks
- NZD/USD holds positive ground around 0.6210 in Tuesday’s Asian session.
- The rising expectation of a Fed rate cut weighs on USD and supports NZD/USD.
- Geopolitical tension in the Middle East might boost safe-haven flows and help limit the USD’s losses.
The NZD/USD pair edges higher to near 0.6210 during the Asian trading hours on Tuesday. The Federal Reserve’s (Fed) dovish stance and firmer US rate cut expectation continue to undermine the US Dollar (USD) broadly. Traders will closely monitor the key US data, including advanced Gross Domestic Product (GDP) Annualized for the second quarter (Q2) and Personal Consumption Expenditures (PCE) Price Index data, which are due later this week.
San Francisco Fed President Mary Daly said on Monday that she believes it’s appropriate for the Fed to begin cutting interest rates. Her dovish remarks echoed comments from Fed Chair Jerome Powell at the Jackson Hole symposium on Friday. Powell has already concluded that the Fed has brought down inflation while preserving labor market strength. Financial markets have fully priced in a 25 basis points (bps) rate cut, while the chance of a deeper rate cut stands at 30%, down from 36.5 % last Friday, according to the CME FedWatch Tool.
On the Kiwi front, the Reserve Bank of New Zealand (RBNZ) has begun its easing cycle, lowering its Official Cash Rate (OCR) to 5.25% in August. Traders expect the New Zealand central bank to cut additional interest rates by 25 basis points (bps) in October and November. This, in turn, might drag the New Zealand Dollar (NZD) lower against the Greenback.
Additionally, the ongoing geopolitical risks in the Middle East could boost the safe-haven flows, benefiting the USD. US Air Force General C.Q. Brown, chairman of the Joint Chiefs of Staff, said early Tuesday that fears of a near-term broader Middle East war have ebbed after Israel and Lebanon’s Hezbollah exchanged fire without further escalation. Nonetheless, the US top general warned that “Iran still poses a significant danger as it weighs a strike on Israel,” per Reuters.
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.