By Areena Fx- NZD/USD depreciates as the US Dollar receives support from market caution ahead of Fedspeak.
- The latest Federal Open Market Committee Meeting Minutes indicated further Fed rate cuts by the year-end.
- The New Zealand Dollar faces challenges after the RBNZ surprisingly cut 50 basis points on Wednesday.
NZD/USD extends its losses for the third successive session, trading around 0.5770 during the Asian hours on Thursday. The pair depreciates as the US Dollar (USD) gains ground ahead of the speech by Federal Reserve (Fed) Chair Jerome Powell due later in the day.
However, the Greenback may face challenges as the latest Federal Open Market Committee (FOMC) Minutes from the September meeting suggested policymakers are leaning toward further rate cuts this year. The CME FedWatch Tool suggests that markets are now pricing in a 92.5% chance of a 25-basis-point Fed rate cut in October and an 78% possibility of another reduction in December.
Fed policymakers noted it would likely be appropriate to ease policy further over the remainder of 2025. Some officials mentioned the financial conditions, suggesting that policy may not be particularly restrictive. Most participants judged downside risks to employment to have increased, while upside risks to inflation had either diminished or not increased.
Traders may adopt caution as the US government shutdown entered its ninth day with no sign of progress, as the Senate on Wednesday once again rejected competing funding proposals from Republicans and Democrats to end the stalemate.
The NZD/USD pair also faced challenges as the New Zealand Dollar (NZD) struggled after a surprise larger-than-expected rate cut by the Reserve Bank of New Zealand on Wednesday. The central bank decided to cut its Official Cash Rate by 50 bps to 2.50%, the lowest level since July 2022. Traders are also expecting a 25 bps RBNZ rate cut at the next meeting in November.
New Zealand Dollar FAQs
What key factors drive the New Zealand Dollar?
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.
How do decisions of the RBNZ impact the New Zealand Dollar?
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.
How does economic data influence the value of the New Zealand Dollar?
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.
How does broader risk sentiment impact the New Zealand Dollar?
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.