The NZD/USD pair posted modest gains near 0.5805 during early Asian trading hours on Tuesday. Expectations of interest rate cuts by the US Federal Reserve (Fed) in 2026 are weighing on the US dollar (USD) against the New Zealand dollar (NZD). The release of the Federal Open Market Committee (FOMC) minutes will take center stage later Tuesday. Financial markets are expected to trade on thin volumes as traders prepare for the New Year holiday.
The US central bank made its third and final rate cut this year at its December policy meeting, bringing the federal funds rate to a target range of 3.50% to 3.75%. Federal Reserve Chairman Jerome Powell said during the press conference that future policy decisions will depend on incoming economic data, especially regarding inflation and the labor market.
According to the CME FedWatch tool, traders have estimated a roughly 16.1% probability that the Fed will cut interest rates at its next policy meeting in January.
U.S. pending home sales rose 3.3% month-on-month in November after an upwardly revised 2.4% rise in October, the National Association of Realtors revealed Monday. This figure was higher than the market consensus of 1.0% and marked its highest level since February 2023.
Analysts believe that the rate cutting cycle by the Reserve Bank of New Zealand (RBNZ) is likely to end for now, which could provide some support to the New Zealand dollar against the US dollar. The Bank of New Zealand cut the official cash rate (OCR) by 25 basis points to 2.25% at its November meeting. The Reserve Bank of New Zealand noted that future changes in interest rates will depend on the economic outlook and inflation expectations.
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 risk 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.
