NZD/USD rises to near 0.6250 due to rising odds of further rate cuts by the Fed
- NZD/USD extends its upside following the PBoC’s interest rates decision on Friday.
- The PBoC holds its current one-year and five-year Loan Prime Rates (LPRs) at 3.35% and 3.85%, respectively.
- The US Dollar struggles amid growing expectations of further Federal Reserve rate cuts in 2024.
NZD/USD continues its winning streak for the third successive day, trading around 0.6250 during the early European hours on Friday. The New Zealand Dollar (NZD) gains ground following the interest rate decision by the People’s Bank of China (PBoC).
The PBoC opted to keep its one-year and five-year Loan Prime Rates (LPRs) unchanged at 3.35% and 3.85%, respectively. As close trade partners, any developments in the Chinese economy can significantly impact Kiwi markets.
In New Zealand, recent data showed that the Gross Domestic Product (GDP) shrank by 0.2% quarter-on-quarter in the second quarter, bringing the economy close to recession. This decline was smaller than the anticipated 0.4% contraction. Year-on-year, the economy contracted by 0.5%, as expected. Markets have already fully priced in another 25 basis point rate cut for October.
The US Dollar remains under pressure as expectations grow for additional rate cuts by the US Federal Reserve by the end of 2024. The latest dot plot projections indicate a gradual easing cycle, with the median rate for 2024 revised down to 4.375% from the June forecast of 5.125%.
US Treasury Secretary Janet Yellen stated on Friday that the recent interest rate cut by the Federal Reserve is a very positive indicator for the US economy. According to Yellen, it demonstrates the Fed's confidence that inflation has significantly decreased and is moving toward the 2% target. Meanwhile, the job market continues to show strength.
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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