The NZD/USD pair is attracting some buyers on dips near the 0.5745-0.5740 region during the Asian session on Monday, and currently appears to have halted its rebound decline from the highest level since October, which was touched earlier this month. However, spot prices lack bullish conviction and are currently trading around the 0.5760 area, up just over 0.5% on the day.
The generally positive tone around equity markets is acting as a tailwind for the risk-sensitive New Zealand dollar amid the Reserve Bank of New Zealand’s (RBNZ) hawkish outlook on the future policy path. In fact, Reserve Bank of New Zealand Governor Anne Breman said last week that the official cash rate (OCR) was likely to remain at its current level of 2.25% for an extended period if economic conditions develop as expected. This supports the NZD/USD pair amid weak US dollar price action.
The US Dollar Index (DXY) is expected to consolidate last week’s modest recovery gains from its lowest level since early October, although downside remains limited in the wake of hawkish comments from Federal Reserve officials. In fact, Cleveland Fed President Beth Hammack said monetary policy is in a good place to pause and assess the effects of 75 basis point rate cuts on the economy during the first quarter, Bloomberg reported Sunday.
Furthermore, higher geopolitical risks could benefit the safe-haven dollar and limit the riskier NZD/USD pair. Russian President Vladimir Putin’s top foreign policy aide said on Sunday that the changes made by the Europeans and Ukraine to the American proposals did not improve the chances of peace. Meanwhile, Israeli Prime Minister Benjamin Netanyahu said officials plan to brief US President Donald Trump on options for attacking Iran again.
This comes on top of rising tensions between the US and Venezuela, which in turn favors US dollar bears and requires some caution before placing aggressive bullish bets around NZD/USD. Traders may also refrain from placing aggressive directional bets as trading volumes are expected to remain weak on the back of the year-end holiday season. This makes it wise to wait for a strong buying follow-through before positioning for any further upside movement during the day.
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.
