- NZD/USD gains ground on risk appetite following the release of US Consumer Price Index data for August on Wednesday.
- U.S. headline inflation fell to a three-year low, raising the odds of a 25-basis-point rate cut by the Fed.
- The New Zealand dollar’s upside may be limited as the RBNZ could implement additional rate cuts by the end of 2024.
The NZD/USD pair is recovering its recent losses recorded in the previous session, trading around 0.6150 during the Asian hours on Thursday. The rise in the NZD/USD pair could be attributed to the improving risk sentiment amid rising expectations of a 25 basis point rate cut by the Fed in September.
US Consumer Price Index (CPI) data for August showed that headline inflation fell to a three-year low, although core inflation beat expectations. This development has increased the likelihood that the Federal Reserve (Fed) will begin its easing cycle with a 25 basis point interest rate cut in September.
The US Consumer Price Index declined to 2.5% year-on-year in August from the previous reading of 2.9%. The index missed the expected reading of 2.6%. Meanwhile, the headline CPI came in at 0.2% month-on-month. The core CPI excluding food and energy remained unchanged at 3.2% year-on-year. On a monthly basis, the core CPI rose to 0.3% from the previous reading of 0.2%.
According to the CME’s FedWatch tool, markets are fully anticipating at least a 25 basis point rate cut by the Federal Reserve at its September meeting. The probability of a 50 basis point rate cut has dropped sharply to 15.0%, from 44.0% a week ago.
In New Zealand, e-card retail sales rose 0.2% month-on-month in August, recovering from a 0.1% decline in the previous month. On a year-on-year basis, e-card transactions fell 2.9%, improving from a 4.9% decline in the previous month. In addition, the monthly Food Price Index rose 0.2% in August, down from a 0.4% increase in July.
The Reserve Bank of New Zealand (RBNZ) began its easing cycle in August with a 25 basis point rate cut. The RBNZ is anticipated to implement additional rate cuts at each of its two remaining meetings this year. Market expectations suggest the current cash rate of 5.25% could decline to 3.0% by the end of 2025.
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.
