NZD/USD weakens below 0.6250 as traders await fresh drivers
- NZD/USD extends its rally around 0.6250 in Wednesday’s early Asian session.
- The firmer bets of Fed rate cuts continue to undermine the US dollar ahead of the key US data.
- RBNZ is open to faster rate cuts, which might drag the Kiwi lower against the USD.
The NZD/USD pair trades on a weaker note near 0.6245 after retracing from eight-month highs during the early Asian session on Wednesday. However, the downside of the pair is likely to be limited due to the weaker US Dollar (USD) after the Federal Reserve (Fed) signalled the upcoming rate cut this year. Fed’s Christopher Waller and Raphael Bostic are scheduled to speak later on Wednesday.
The prospect of upcoming US interest rate cuts might continue to exert some selling pressure on the Greenback. The rate futures markets have priced in nearly 34.5% odds that the Fed will cut rates by 50 basis points (bps) in September, with 100 bps Fed easing expected this year.
Data released by the Conference Board on Tuesday revealed that the US Consumer Confidence Index rose to 103.3 in August from an upwardly revised 101.9 in July. This figure improved to a six-month high amid optimism over the economic outlook. However, concerns about the labor market remain after the Unemployment Rate jumped to near a three-year high of 4.3% last month.
Investors are looking forward to fresh drivers from the US economic data this week. The preliminary estimate for the US Gross Domestic Product (GDP) for the second quarter (Q2) and the Personal Consumption Expenditures (PCE) Price Index, the Fed’s preferred inflation gauge, will be published on Thursday and Friday, respectively.
After a surprise interest rate cut by the Reserve Bank of New Zealand (RBNZ) in its August meeting, there is speculation among monetary policy committee members to accelerate future cuts if economic data suggests increasing downside risks to activity and inflation. Traders expect the New Zealand central bank to cut rates by 25 bps in October and November. This, in turn, might weigh on the New Zealand Dollar (NZD) and cap the upside for the pair.
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.