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New Zealand Dollar holds positive ground amid rising Fed rate cut expectations

  • The New Zealand Dollar extends its rally in Monday’s Asian session. 
  • Rising bets of a Fed rate cut in September drag the USD lower and support the pair. 
  • Traders await New Zealand’s Trade Balance data and the PBoC interest rate decision on Tuesday for fresh impetus.

The New Zealand Dollar (NZD) gathers strength on Monday. The weaker US housing data on Friday has added to concerns over the US economy’s strength, especially after recent softer inflation and labor reports. Traders place more bets on interest rate cuts from the US Federal Reserve in September, which undermine the US Dollar (USD) and create a tailwind for NZD/USD. 

However, the dovish stance of the Reserve Bank of New Zealand (RBNZ) after a surprise rate cut last week might weigh on the Kiwi as the easing cycle came much sooner than expected. Additionally, any signs of a weaker Chinese economy might cap the upside for China’s proxy NZD as China is New Zealand’s largest trading partner. 

Traders will monitor New Zealand’s Trade Balance data and the People’s Bank of China’s (PBoC) interest rate decision on Tuesday. The highlight this week will be Fed Chair Powell’s speech at the Jackson Hole symposium on Friday. This event might offer some hints about guidance on the pace of Fed easing. 

Daily Digest Market Movers: New Zealand Dollar gains ground amid Fed rate cuts hope

  • New Zealand’s Business NZ Performance of Services Index (PSI) improved to 44.6 in July from the previous reading of 40.7, according to Business NZ on Monday. 
  • RBNZ Governor Adrian Orr said on Friday that the committee has achieved a very strong level of confidence that low and stable inflation is back within the 1-3% range.
  • The preliminary University of Michigan Consumer Sentiment Index improved to 67.8 in August from the previous reading of 66.4, above the market consensus of 66.9. This figure rose for the first time in five months.
  • The US Housing Starts declined by 6.8% in July to 1.238 million units, compared to the 1.1% increase in June, while the Building Permits decreased by 4.0% in July after rising 3.9% in June.
  • Federal Reserve Bank of Chicago President Austan Goolsbee said on Sunday that the US economy does not show signs of overheating, so Fed policymakers should be cautious about keeping restrictive policy in place longer than necessary.
  • San Francisco Fed President Mary Daly said that the US central bank needs to take a gradual approach to lowering borrowing costs, per Financial Times.  

Technical Analysis: New Zealand Dollar’s uptrend is likely to resume

The New Zealand Dollar trades on a stronger note on the day. The NZD/USD pair seems set to close above the key 100-day Exponential Moving Average (EMA) and descending trendline on the daily chart. If the pair decisively closes above this level, it will resume the uptrend. The 14-day Relative Strength Index (RSI) points higher above the midline near 56.60, the potential for further upside.

The immediate resistance levels to watch are the 0.6085-0.6090 zone, representing the high of August 14 and the upper boundary of the Bollinger Band. Sustained trading above this level could see a rally to 0.6154, the high of July 8. The next barrier is seen at 0.6222, the high of June 12. 

On the other hand, the confluence of the 100-day EMA and descending trendline of 0.6048 acts as an initial support level for NZD/USD. The additional downside filter to watch is 0.5974, the low of August 15. Any follow-through selling will see a drop to 0.5853, the lower limit of the Bollinger Band.

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.