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NZD/USD depreciates to three-month lows near 0.5950 due to caution ahead of US election

  • NZD/USD has marked the three-month low at 0.5957 on Monday.
  • The US Dollar appreciates due to market caution ahead of the upcoming US presidential election.
  • The RBNZ is widely anticipated to deliver another 50-basis-point rate cut in November.

NZD/USD trims its daily losses, trading around 0.5970 during the European hours on Monday. The US Dollar (USD) receives support due to market caution ahead of the upcoming US presidential election in November.

Over the past three weeks, allies of former President Donald Trump have faced at least 10 court defeats in key battleground states that could impact the outcome of the November 5 election between Republican candidate Trump and his Democratic opponent, Vice President Kamala Harris.

The downside risks for the NZD/USD pair is bolstered as the US Dollar (USD) strengthens as recent positive economic data from the United States (US) has fueled expectations for a more cautious stance from the Federal Reserve (Fed) in November.

The US Dollar receives support from the higher Treasury yields. The US Dollar Index (DXY), which measures the value of the US Dollar against its six major peers, trades around 104.30 with 2-year and 10-year yields on US Treasury bonds standing at 4.12% and 4.28%, respectively, at the time of writing.

The New Zealand Dollar (NZD) faces pressure as the Reserve Bank of New Zealand (RBNZ) is anticipated to implement another 50-basis-point rate cut in its final policy meeting of the year in November. Markets are even factoring in a potential 75-point cut.

Meanwhile, China’s Vice Minister of Finance, Liao Min, announced on Monday that the country would increase countercyclical adjustments in its macroeconomic policies to support economic recovery in the fourth quarter, expressing confidence in achieving the 5% growth target. Any positive developments from these initiatives could boost the NZD, given China’s significance as a major trading partner for New Zealand.

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.