NZD/USD extends downside to near 0.5650 as traders await Fed rate decision
- NZD/USD softens to around 0.5665 in Wednesday’s early Asian session.
- The Fed is expected to hold its benchmark rate steady on Wednesday.
- RBNZ’s Conway said rate will tend towards neutral in the absence of future shocks to the system as pandemic-related disruptions fade.
The NZD/USD pair extends the decline to near 0.5665 during the early Asian session on Wednesday, pressured by the renewed US Dollar (USD) demand. The US Federal Reserve interest rate decision will take center stage later on Wednesday.
Market pricing is pointing to a near 100% certainty that the Fed will keep the policy rate in a target range of 4.25%-4.50%, according to the CME FedWatch tool. However, investors will closely watch Fed Chair Jerome Powell’s press conference as it might offer additional insights into the monetary policy outlook. The cautious stance from the Fed officials could provide some support to the Greenback and act as a headwind for the pair.
“Nobody knows what to expect from the White House. The policy moves are still very unclear, but we do know that a number of those proposals that have been talked about in the White House are a bit inflationary, and I think that’s going to keep the Fed in check,” said U.S. Bank chief economist Beth Ann Bovino.
Late Tuesday, RBNZ Chief Economist Paul Conway said 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 bets of the Reserve Bank of New Zealand (RBNZ) could undermine the New Zealand Dollar (NZD). Swaps markets are now pricing in nearly 90% possibility of another 50 basis points (bps) reduction on February 19, adding to the two delivered earlier in the cycle. The New Zealand central bank is anticipated to deliver a total of 100 bps of rate cuts for the remainder of 2025.
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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