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NZD/USD plunges to 0.6070 as RBNZ reports dovish interest rate outlook

  • NZD/USD tumbles near 0.6070 as RBNZ offers dovish interest rate guidance.
  • The RBNZ expects inflation to return to the 1%-3% range in the second quarter of this year.
  • Investors are awaiting US inflation data for further clues on the timing of rate cuts.

The NZD/USD pair is falling vertically near 0.6070 in the European session on Wednesday. The New Zealand asset is facing an intense sell-off as the Reserve Bank of New Zealand (RBNZ) unexpectedly offered dovish guidance on interest rates by keeping the official cash rate (OCR) steady at 5.5%, as expected.

The RBNZ opened the door for rate cuts amid easing consumer inflation expectations. The central bank favoured maintaining the tight monetary policy framework, but the degree of tightening will be eased. As for the inflation outlook, the RBNZ expects price pressures to return to the desired range of 1%-3% in the second half of this year.

Meanwhile, market sentiment remains firm as investors expect the Federal Reserve (Fed) to start cutting interest rates from the September meeting. S&P 500 futures have posted decent gains in European trading hours. US 10-year Treasury yields are down near 4.29% as Fed Chair Jerome Powell noted in his semi-annual testimony before Congress on Tuesday that escalating inflation is not the only risk for the central bank with a cooling trend in labor demand.

Fed Chair Powell said, “Labor market conditions have cooled considerably compared with two years ago,” adding that the U.S. “is no longer an overheated economy,” Reuters reported.

The cooling US economic outlook is unfavourable for the US Dollar (USD). The Dollar Index (DXY), which tracks the value of the Greenback against six major currencies, is struggling to extend the recovery above 105.20.

Looking ahead, investors will focus on the US (US) Consumer Price Index (CPI) data for June, due on Thursday. The core CPI, which excludes volatility in food and energy prices, is estimated to have grown steadily both on a monthly and annual basis.

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

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