The NZD/USD pair fell to around 0.5765 during early Asian trading hours on Friday, under pressure from a rebounding US dollar (USD). However, the potential downside for the pair may be limited amid rising bets on an interest rate cut by the Federal Reserve next week. Traders will benefit from further signals from the delayed US Personal Consumption Expenditures (PCE) Price Index report for September, which is due later on Friday.
The US central bank is likely to cut its key interest rate at its December meeting next week following a slowdown in the labor market and dovish statements from Fed officials such as New York Fed President John Williams and Fed Governor Christopher Waller. Fed funds futures traders now expect a roughly 89% chance of a rate cut next week, up from a 71% chance a week ago, according to the CME FedWatch tool.
On the New Zealand front, the Reserve Bank of New Zealand (RBNZ) decided to cut the official cash rate (OCR) by a quarter of a percentage point to 2.25% last week, as was widely expected. The Bank of New Zealand has indicated that future changes in interest rates will depend on the economic outlook and inflation expectations, and analysts believe that the interest rate cutting cycle is likely over for now. This, in turn, could provide some support to the New Zealand Dollar (NZD) against the US Dollar.
Lagging US PCE inflation data will be in the spotlight later today, which could give insight into the path of the US interest rate. The headline PCE index is expected to show a 2.8% year-on-year increase in September, while the core PCE index is expected to show a 2.9% rise over the same period. In the event of a hotter than expected inflation reading, it could strengthen the US dollar and create headwinds for the pair in the near term.
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 NZD. 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.
