NZD/USD extends downside below 0.6100, all eyes on Fed’s Powell speech
- NZD/USD remains under some selling pressure around 0.6070 in Tuesday’s early Asian session.
- US manufacturing activity continued to decline in June.
- NZIER New Zealand Business Confidence extends decline in Q2.
The NZD/USD pair extends the decline near 0.6070 during the early Asian session on Tuesday. The renewed US Dollar (USD) demand and a further decline in New Zealand’s business activity outlook surveys drag the pair lower. Market players will keep an eye on Federal Reserve (Fed) Chairman Jerome Powell's speech on Tuesday for fresh impetus, followed by the Fed’s latest monetary policy minutes on Wednesday.
Growth in activity in the United States manufacturing sector continued to contract in June, according to the Institute for Supply Management (ISM) on Monday. The US ISM Manufacturing Purchasing Managers Index (PMI) declined to 48.5 in June from 48.7 in May, below the market expectation of 49.1.
The weaker-than-expected US Manufacturing PMI data, along with the US Personal Consumption Expenditures (PCE) Price Index data last week, have spurred speculation that the Fed would start an easing cycle this year, which might weigh on the Greenback. Traders are now pricing in nearly 59.5% chance of 25 basis points (bps) of Fed rate cut in September, up from 58.2% last Friday, according to CME FedWatch Tool.
On the Kiwi front, the latest data from the New Zealand Institute of Economic Research (NZIER) showed on Tuesday that the country’s Business Confidence deteriorated in the second quarter (Q2), falling 44% QoQ from the previous reading of a 25% fall. The downbeat reading undermines the New Zealand Dollar (NZD). Additionally, the expectation that the Reserve Bank of New Zealand (RBNZ) will cut rates earlier than projected exerts some selling pressure on the Kiwi.
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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