- NZD/USD loses ground as risk aversion rises amid fears of US economic slowdown
- The CME FedWatch tool indicates a 74.5% probability of a 50 basis point rate cut by the Fed in September.
- The RBNZ is partly expected to make an early interest rate cut in August and fully expected to make one in October.
NZD/USD extends its losses for the second consecutive day, trading around 0.5930 during the European session on Tuesday. Rising tensions in the Middle East and fears of an economic slowdown in the United States (US) have dampened the appeal of risk-sensitive currencies such as the New Zealand Dollar (NZD).
However, the downside for the NZD/USD pair could be limited as the US Dollar (USD) may struggle due to the expectation of a 50 basis points (bps) interest rate cut by the US Federal Reserve (Fed) in September. The CME FedWatch tool indicates a 74.5% probability of this relatively larger cut happening at the September meeting, a significant increase from the 11.4% probability reported a week earlier.
According to Reuters, San Francisco Federal Reserve Bank President Mary Daly expressed increasing confidence on Monday that U.S. inflation is moving toward the Fed’s 2% target. Daly noted that “risks to the Fed’s mandates are becoming more balanced and there is openness to the possibility of rate cuts at upcoming meetings.”
In New Zealand, expectations of an early interest rate cut by the Reserve Bank of New Zealand (RBNZ) are putting pressure on the New Zealand Dollar, weighing on the NZD/USD pair. This sentiment follows recent data indicating that the annual domestic CPI rate fell to its lowest level in three years for the June quarter. The RBNZ’s next monetary policy meeting is scheduled for August 14, with markets partially anticipating a rate cut at that meeting and fully expecting one in October.
Traders will likely keep a close eye on the release of China’s July Consumer Price Index (CPI) on Friday for fresh impetus. The CPI is expected to show a year-on-year increase of 0.4%. A weaker-than-expected reading or signs of an economic slowdown in China could weigh on the New Zealand dollar, given China’s close trading relationship with New Zealand.
New Zealand Dollar FAQs
The New Zealand Dollar (NZD), also known as the Kiwi, is a well-known currency among investors. Its value is largely determined by the health of the New Zealand economy and the policies of the country’s central bank. However, there are some peculiarities that can also cause the NZD to move. Developments in the Chinese economy tend to move the Kiwi because China is New Zealand’s largest trading partner. Bad news for the Chinese economy will likely translate into fewer New Zealand exports to the country, which will affect the economy and therefore its currency. Another factor that moves the NZD is dairy prices, as the dairy industry is New Zealand’s main export. High dairy prices boost export earnings, contributing positively to the economy and therefore the NZD.
The Reserve Bank of New Zealand (RBNZ) aims to achieve and maintain an inflation rate of between 1% and 3% over the medium term, with the aim of keeping it close to the midpoint of 2%. To do this, the bank sets an appropriate level of interest rates. When inflation is too high, the RBNZ raises interest rates to cool the economy, but the move will also push up bond yields, increasing the attractiveness of investors to invest in the country and thus boosting the NZD. Conversely, lower interest rates tend to weaken the NZD. The so-called rate spread, or how rates in New Zealand are or are expected to be compared to those set by the US Federal Reserve, can also play a key role in the movement of the NZD/USD pair.
Macroeconomic data releases in New Zealand are key to assessing the state of the economy and can influence the valuation of the New Zealand Dollar (NZD). A strong economy, based on high economic growth, low unemployment and high confidence is good for the NZD. High economic growth attracts foreign investment and can encourage the Reserve Bank of New Zealand to raise interest rates if this economic strength is accompanied by high inflation. Conversely, if economic data is weak, the NZD is likely to depreciate.
The New Zealand Dollar (NZD) tends to strengthen during periods of risk appetite, or when investors perceive that overall market risks are low and are optimistic about growth. This often translates into a more favourable outlook for commodities and so-called “commodity currencies” such as the kiwi. Conversely, the NZD tends to weaken during times of market turmoil or economic uncertainty, as investors tend to sell riskier assets and flee to more stable havens.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
