NZD/USD attracts some buyers above 0.5550, RBNZ rate decision in focus
- NZD/USD climbs to around 0.5580 in Tuesday’s Asian session.
- Traders move to price in five Fed rate cuts by year-end.
- China’s central bank said it will provide lending support to sovereign funds to stabilize the market.
The NZD/USD pair attracts some buyers to around 0.5580 during the Asian trading hours on Tuesday. US President Donald Trump's tariffs on trade partners have raised fears of the potential recession in the United States, weighing on the Greenback. The Reserve Bank of New Zealand (RBNZ) interest rate decision will take center stage on Wednesday.
Traders are now pricing in five 25 basis points (bps) rate cuts from the Federal Reserve (Fed) by year-end as rising fears of a recession in the US are exacerbating the pricing in the past week. According to the CME FedWatch tool, derivatives markets now imply a 44% possibility that the Fed will cut rates at its next meeting on May 6-7, up from 14% a week ago. The rising expectation of more Fed rate reductions this year drags the US Dollar (USD) lower and acts as a tailwind for NZD/USD.
On the other hand, China’s stimulus plans could underpin the China-proxy Kiwi, as China is a major trading partner of New Zealand. The People’s Bank of China (PBoC) said early Tuesday that it will provide support to a sovereign fund when needed as it firmly supports its decision to buy more stocks. In a statement, China's central bank said that it will step up funding aid via a re-lending program to Central Huijin Investment Ltd. when it’s necessary, as needed, to ensure capital market stability.
All eyes will be on the RBNZ interest rate decision on Wednesday, which is expected to cut its Official Cash Rate (OCR) by 25 bps to 3.5%. The move comes amid easing inflation, slowing economic growth, and emerging signs of labor market weakness. Nearly 90% of the economists from the Reuters poll expect another 25 bps cut in May. The median forecast indicated a further 25 bps reduction in the third quarter, which would bring the OCR to 3.00% by the end of September.
New Zealand Dollar FAQs
The New Zealand Dollar (NZD), also known as the Kiwi, is a well-known traded currency among investors. Its value is broadly determined by the health of the New Zealand economy and the country’s central bank policy. Still, there are some unique particularities that also can make NZD move. The performance of the Chinese economy tends to move the Kiwi because China is New Zealand’s biggest trading partner. Bad news for the Chinese economy likely means less New Zealand exports to the country, hitting the economy and thus its currency. Another factor moving NZD is dairy prices as the dairy industry is New Zealand’s main export. High dairy prices boost export income, contributing positively to the economy and thus to the NZD.
The Reserve Bank of New Zealand (RBNZ) aims to achieve and maintain an inflation rate between 1% and 3% over the medium term, with a focus to keep it near the 2% mid-point. To this end, the bank sets an appropriate level of interest rates. When inflation is too high, the RBNZ will increase interest rates to cool the economy, but the move will also make bond yields higher, increasing investors’ appeal to invest in the country and thus boosting NZD. On the contrary, lower interest rates tend to weaken NZD. The so-called rate differential, or how rates in New Zealand are or are expected to be compared to the ones set by the US Federal Reserve, can also play a key role in moving the NZD/USD pair.
Macroeconomic data releases in New Zealand are key to assess the state of the economy and can impact the New Zealand Dollar’s (NZD) valuation. A strong economy, based on high economic growth, low unemployment and high confidence is good for NZD. High economic growth attracts foreign investment and may encourage the Reserve Bank of New Zealand to increase interest rates, if this economic strength comes together with elevated inflation. Conversely, if economic data is weak, NZD is likely to depreciate.
The New Zealand Dollar (NZD) tends to strengthen during risk-on periods, or when investors perceive that broader market risks are low and are optimistic about growth. This tends to lead to a more favorable outlook for commodities and so-called ‘commodity currencies’ such as the Kiwi. Conversely, NZD tends to weaken at times of market turbulence or economic uncertainty as investors tend to sell higher-risk assets and flee to the more-stable safe havens.
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