The NZD/USD pair gathers strength to around 0.5880 during the Asian trading hours on Friday. The New Zealand Dollar (NZD) edges higher against the US Dollar (USD) on a narrower-than-expected New Zealand trade deficit. Traders will closely watch the ongoing conflict in the Middle East, which could impact the currency pair.
Data released by Statistics New Zealand on Friday showed that New Zealand recorded a monthly trade deficit of NZ$257 million in February, compared to a NZ$627 million trade deficit in January. This figure was narrower than market expectations of a NZ$470 million shortfall. The Kiwi strengthens against the USD following the upbeat economic data.
However, weaker New Zealand’s Gross Domestic Product (GDP) might cap the upside for the pair. New Zealand’s economy grew by 0.2% QoQ in the fourth quarter (Q4), compared with a 0.9% expansion (revised from 1.1%) in Q3. This reading came in weaker than the expectation of 0.4%. The fourth-quarter GDP expanded by 1.3% YoY, compared with a rise of 1.1% (revised from 1.3%) in Q3, while falling short of the 1.7% growth forecast.
The US Federal Reserve (Fed) on Wednesday decided to maintain its target range for the federal funds rate at 3.50-3.75%, as widely expected. Fed policymakers signaled a quarter of a percentage point rate cut by the end of this year, a view that on the surface was unchanged from their last set of projections in December.
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.
