The NZD/USD pair snapped a five-day losing streak, trading around the 0.5760 level during Asian business hours on Friday. The pair is rising as the US Dollar (USD) loses strength due to expectations of two more interest rate cuts by the Federal Reserve in 2026.
Markets are preparing for US President Donald Trump to nominate a new Federal Reserve Chairman to replace Jerome Powell when his term ends in May, a move that could push monetary policy towards lower interest rates. The Fed cut interest rates by 25 basis points at its December meeting, bringing the target range to 3.50%-3.75%. The Fed cut cumulative interest rates by 75 basis points in 2025 amid a cool labor market and still-high inflation.
The CME FedWatch tool shows an 85.1% probability of holding interest rates at the Fed’s January meeting, up from 84.5% the week before. Meanwhile, the probability of a 25 basis point rate cut fell to 14.9% from 15.5% a week ago.
However, minutes from the December FOMC meeting indicated divided expectations for policy. Most participants felt it would likely be appropriate to hold off on further interest rate cuts if inflation continues to decline, while some officials argued for keeping interest rates unchanged for a period after three cuts in 2025 aimed at supporting a weak labor market.
The New Zealand Dollar (NZD) is also finding support from strong expectations of a rate hike by the Reserve Bank of New Zealand (RBNZ). Recent data showed that the economy rebounded in the third quarter, reinforcing signs of a modest recovery after a long period of weakness. Anna Bryman, Governor of the Reserve Bank of New Zealand, added that interest rates were likely to remain at current levels for some time.
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.
