NZD/USD inches higher to near 0.6050, upside seems limited due to increased risk aversion
- NZD/USD may face challenges due to dovish sentiment surrounding the RBNZ’s policy outlook.
- New Zealand's monthly Trade Balance reported a deficit of $2.1 billion in September, against the previous deficit of 2.3 billion.
- The US Dollar gains support from increased risk aversion as concerns grow over a potential resurgence of inflation in the US.
NZD/USD recovers some of its recent losses, trading around 0.6040 during Tuesday's Asian session. However, the New Zealand Dollar (NZD) faces pressure as the likelihood of further rate cuts in November by the Reserve Bank of New Zealand (RBNZ) grows, with inflation easing and economic output remaining sluggish.
In September, New Zealand's monthly Trade Balance showed a deficit of $2.1 billion, with Exports increasing by $246 million (5.2%) to $5.0 billion, while Imports declined by $67 million (0.9%) to $7.1 billion.
The NZD may have found some support following China’s rate cuts on Monday. As New Zealand's largest trading partner, China’s decision to lower its 1-year Loan Prime Rate (LPR) to 3.10% from 3.35% and its 5-year LPR to 3.60% from 3.85% could stimulate domestic economic activity, potentially boosting demand for New Zealand exports.
The US Dollar (USD) gained support following a surge in US Treasury yields, which climbed over 2% on Monday. At the time of writing, the 2-year and 10-year US Treasury bond yields stand at 4.02% and 4.18%, respectively. This rise was fueled by signs of economic resilience and growing concerns about a potential resurgence of inflation in the United States, reinforcing expectations of tighter monetary policy.
Recent economic data dispelled the likelihood of a bumper rate cut by the Federal Reserve (Fed) in November. According to the CME FedWatch Tool, the likelihood of a 25-basis-point rate cut in November is 89.1%, with no expectation of a larger 50-basis-point cut.
Federal Reserve Bank of Minneapolis President Neel Kashkari highlighted on Monday that the Fed is closely monitoring the US labor market for signs of rapid destabilization. Kashkari cautioned investors to anticipate a gradual pace of rate cuts over the coming quarters, suggesting that any monetary easing will likely be moderate rather than aggressive.
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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