The New Zealand dollar’s rebound from the 0.5740 area on Monday failed to find a follow-through above the 0.5800 level during the European session on Tuesday, and the pair pulled back to the 0.5790 area, heading into the US session open.
The risk appetite witnessed in the US trading session on Monday and the Asian session on Tuesday diminished during the London session. Investors appear to have trimmed short positions in the US, in preparation for a series of key US employment numbers, which shed some light on the path of interest rate cuts by the US Federal Reserve.
The US dollar fell on Monday against most of its peers after the ISM Manufacturing PMI showed that sector activity fell to 47.9 in December, from 48.2 in November, reaching its lowest level in the past 14 months.
Furthermore, Minneapolis Fed President Neel Kashkari sounded dovish, warning of the risk of higher unemployment and supporting markets’ view that the Fed will be forced to cut interest rates less than expected in 2026.
In New Zealand, third-quarter GDP beat expectations in December, raising hopes that the Reserve Bank of New Zealand’s (RBNZ) easing cycle last year will come to an end. Anne Breyman, Governor of the Reserve Bank of New Zealand, echoed these views, pointing to a steady monetary policy for an extended period.
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.
