NZD/USD recovers above 0.5650 amid tariff uncertainty
- NZD/USD rebounds to near 0.5660 in Thursday's early Asian session.
- Fed left the policy rate steady on Wednesday.
- RBNZ’s Conway painted a dim picture of the country's economic outlook, citing weak productivity, investment and trade.
The NZD/USD pair recovers some lost ground to around 0.5660, snapping the three-day losing streak during the early Asian session on Thursday. The US Dollar (USD) retreats from the weekly high of 108.30 as investors await tariff certainty from US President Donald Trump.
The US Federal Reserve (Fed) decided to hold interest rates steady in the current 4.25%-4.50% range at its January meeting on Wednesday. During the press conference, Fed Chair Jerome Powell said that there would be no rush to cut them again until inflation and jobs data made it appropriate. Powell added that he believes the progress in lowering inflation will resume this year, but has now put rates on hold as he awaits data to confirm it.
"While we continue to think the Fed's easing cycle has not yet run its course, the FOMC will want to see further progress in the inflation data to deliver the next rate cut, highlighted by the fact they removed the reference on inflation making progress,” said Lindsay Rosner, head of multi-sector fixed-income investing at Goldman Sachs Asset Management.
Later on Thursday, market players will keep an eye on the advanced US Gross Domestic Product (GDP) for the fourth quarter (Q4), including the weekly Initial Jobless Claims, and Pending Home Sales. In case of a stronger-than-expected outcome, this could lift the Greenback against the New Zealand Dollar (NZD).
The Reserve Bank of New Zealand’s (RBNZ) chief economist Paul Conway painted a dim picture of the country's economic outlook, citing weak productivity, investment and trade. Conway further stated that easing domestic pricing intentions and a drop in inflation expectations will help open the way for some further easing of the OCR, as signalled in November.
The dovish expectation of the New Zealand central bank might cap the upside for the Kiwi in the near term. The RBNZ is anticipated to deliver another 50 basis points (bps) reduction on February 19, adding to the two delivered earlier in the cycle.
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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