The NZD/USD pair posted modest gains near 0.5775 during the early Asian session on Friday. The US Dollar (USD) fell against the New Zealand Dollar (NZD) as lower-than-expected US inflation data raised hopes for an interest rate cut by the US Federal Reserve. Traders are awaiting the release of the University of Michigan Consumer Confidence Index for December, which is scheduled to be released later on Friday.
Data released by the US Bureau of Labor Statistics (BLS) on Thursday revealed that the US Consumer Price Index (CPI) fell to 2.7% in November. This reading was lower than market expectations of 3.1%. Meanwhile, the US core CPI, which excludes volatile food and energy prices, rose 2.6%, missing expectations of 3.0%. This number represents the slowest pace since 2021.
This unexpected softness, announced after a delay due to the government shutdown in October, fueled speculation that the US central bank may cut interest rates sooner than previously expected. This, in turn, could put some selling pressure on the dollar and act as a tailwind for the pair.
The New Zealand economy saw a stronger-than-expected recovery in the third quarter, with GDP rising by 1.1%. The figure came after a revised 1.0% contraction in the second quarter. An upbeat New Zealand GDP report may support the NZD/USD in the near term.
However, signs of weakness in the Chinese economy could affect the New Zealand dollar as a Chinese proxy, as China is a major trading partner for New Zealand. Data released earlier this week showed that retail sales in China rose 1.3% year-on-year in November, compared to 2.9% in October, according to the National Bureau of Statistics on Monday. This figure was lower than market expectations of 2.9%. Industrial production in the country rose by 4.8% on an annual basis in the same period, compared to the expected 5.0% and the previous 4.9%.
Frequently asked questions about the New Zealand dollar
The New Zealand Dollar (NZD), also known as the Kiwi, is a popular currency among investors. Its value is widely determined by the health of the New Zealand economy and the policy of the country’s central bank. However, there are some unique characteristics that could make the New Zealand dollar move as well. The performance of the Chinese economy tends to move the New Zealand dollar because China is New Zealand’s largest trading partner. Bad news for the Chinese economy will likely mean New Zealand’s exports to the country will decline, affecting the economy and therefore its currency. Another factor that affects the New Zealand dollar is dairy prices as the dairy industry is New Zealand’s main export. Higher dairy prices boost export income, which contributes positively to the economy and therefore the New Zealand dollar.
The Reserve Bank of New Zealand (RBNZ) aims to achieve and maintain inflation between 1% and 3% over the medium term, with a focus on keeping it near the 2% midpoint. To this end, the Bank sets an appropriate level of interest rates. When inflation is very high, the Reserve Bank of New Zealand will increase interest rates to cool the economy, but this move will also cause bond yields to rise, making it more attractive for investors to invest in the country and thus strengthening the New Zealand dollar. Conversely, low interest rates tend to weaken the New Zealand dollar. The so-called spread, or how New Zealand’s interest rates compare or are expected to compare to those set by the US Federal Reserve, can also play a major role in moving the NZD/USD pair.
New Zealand’s macroeconomic data releases 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 New Zealand dollar. High economic growth attracts foreign investment and may encourage the Reserve Bank of New Zealand to increase interest rates, if this economic strength is accompanied by higher inflation. Conversely, if economic data is weak, the value of the New Zealand dollar is likely to decline.
The New Zealand Dollar (NZD) tends to strengthen during periods of risk, or when investors view broader market risks as low and are optimistic about growth. This tends to lead to a more positive outlook for commodities and so-called “commodity currencies” such as the New Zealand. Conversely, the New Zealand dollar tends to weaken in times of market turmoil or economic uncertainty as investors tend to sell riskier assets and flee to more stable safe havens.
