NZD/USD drifts lower below 0.5650 as weaker GDP fuels RBNZ rate cut bets
- NZD/USD softens to near 0.5625 in Friday’s early Asian session.
- The weaker Q3 GDP data sparked bets on aggressive RBNZ rate cuts.
- The hawkish Fed expectations boost the USD and create a headwind for NZD/USD.
The NZD/USD pair remains under selling pressure around 0.5625 during the Asian trading hours on Friday. The deep recession in New Zealand fueled the Reserve Bank of New Zealand (RBNZ) rate cut bets, which undermine the Kiwi.
The weaker-than-expected New Zealand’s Gross Domestic Product (GDP) data for the third quarter raised the risk of further large-scale interest rate cuts from the RBNZ. The markets have priced in a 91% chance of another 50 bps RBNZ rate reduction in February.
”It supports the Reserve Bank getting on with official cash rate cuts and getting the OCR back to a more neutral level more quickly than they were anticipating in the November monetary policy statement,” said Harbour Asset Management fixed income and currency strategist Hamish Pepper.
On the other hand, the hawkish rate cut by the Federal Reserve (Fed) on Wednesday lifts the USD and contributes to the pair’s downside. During the Press Conference, Fed Chair Jerome Powell made clear that the Fed is going to be cautious about further cuts. Later on Friday, investors will monitor the release of the US Core Personal Consumption Expenditures (PCE) Price Index data, which is expected to show an increase of 2.9% YoY in November.
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.