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NZD/USD trims losses near 0.6100 ahead of US CPI data

  • NZD/USD rebounds to 0.6090 in early Asian session on Thursday.
  • The RBNZ held its policy rate steady at its July meeting and struck a less hawkish tone.
  • Fed’s Powell said the central bank will make interest rate decisions based on data, not political factors.

The NZD/USD pair is trading on a stronger note around 0.6090 during the early Asian session on Thursday. The pair is regaining some lost ground on the back of the weaker US Dollar (USD) after retreating from the weekly high of near 0.6155. The release of the US Consumer Price Index (CPI) data for June will be in focus on Thursday.

On Wednesday, the Reserve Bank of New Zealand (RBNZ) decided to hold its official cash rate (OCR) for an eighth consecutive meeting at 5.5%, the highest since December 2008. The board flags a risk that domestically driven inflation could become more persistent in the near term. The central bank expects headline inflation to return to the 1-3% target range in the second half of this year. A less hawkish view on inflation will likely put some selling pressure on the Kiwi for the time being.

On the USD front, Federal Reserve (Fed) Chairman Jerome Powell said on Wednesday that the US central bank would make interest rate decisions based on data, incoming data, the evolving outlook and the balance of risks, and not on consideration of political factors.

Moreover, Powell stressed that the Fed will not consider it appropriate to cut the policy rate until they gain greater confidence that inflation is sustainably heading towards the Fed’s 2% target. The Fed’s cautious stance could boost the Dollar in the near term. However, investors will take further cues from the key US inflation report later in the day. A softer reading of CPI inflation could trigger the expectation of Fed rate cuts this year and could weigh on the US Dollar (USD) against the NZD.

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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