NZD/USD maintains position above 0.5600 due to increased odds of Fed rate cuts
- NZD/USD strengthened as December's US CPI data fueled speculation that the Fed might implement two interest rate cuts this year.
- US Core CPI increased 3.2% YoY in December, slightly below the expected 3.3% rise.
- The New Zealand Dollar strengthened on improved market sentiment following reports of the incoming Trump administration considering gradual tariff hikes.
NZD/USD remains above 0.5600 during the Asian hours on Thursday following three successive days of gains. The pair received gains as the US Dollar (USD) extended its downside following the cooler-than-expected US Consumer Price Index (CPI) inflation data for December raises the bet that the US Federal Reserve (Fed) could cut interest rates twice this year.
The US Consumer Price Index increased by 2.9% year-over-year in December, up from 2.7% in November, aligning with market expectations. On a monthly basis, CPI rose 0.4%, following a 0.3% increase in the previous month.
US Core CPI, which excludes volatile food and energy prices, rose 3.2% annually in December, slightly below November's figure and analysts' forecast of 3.3%. On a monthly basis, core CPI edged up 0.2% in December 2024.
The US Dollar Index (DXY), which gauges the US Dollar's performance against six major currencies, is trading near 109.00. Meanwhile, 2-year and 10-year US Treasury bond yields are at 4.27% and 4.66%, respectively. Both yields dropped by over 2% on Wednesday as softer US core CPI data fueled expectations that the Federal Reserve’s easing cycle may continue.
The risk-sensitive New Zealand Dollar (NZD) strengthened on improved market sentiment following reports from Bloomberg suggesting that US President-elect Donald Trump's economic team is considering a gradual approach to raising import tariffs, boosting investor confidence.
The NZD also found support from strong trade data out of China and Beijing's measures to stabilize the Yuan. However, its gains may be capped as markets expect the Reserve Bank of New Zealand (RBNZ) to cut its 4.25% cash rate by 50 basis points in February, reflecting the country's weak economic conditions.
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.