The NZD/USD pair recovers some lost ground near 0.5750, snapping the three-day losing streak during the early Asian trading hours on Friday. Ongoing US government shutdown undermines the US Dollar (USD) against the New Zealand Dollar (NZD). The preliminary reading of the U-Mich Consumer Sentiment report will be released later on Friday.
Senators struggle to find a way forward as the US government shutdown enters its tenth day. The Bureau of Labor Statistics and the Bureau of Economic Analysis have suspended data collecting and reporting, which complicates the Federal Reserve’s (Fed) decision-making on interest rates and businesses’ ability to make informed decisions. A prolonged US federal shutdown could drag the Greenback lower and act as a tailwind for the pair in the near term.
The RBNZ reduced the Official Cash Rate (OCR) by 50 basis points (bps) to 2.5% from 3.0% at its October meeting on Wednesday and remains open to further reductions. The decision came as a surprise to markets, which had widely expected the RBNZ to cut the OCR by 25 bps.
Investors are currently pricing in another 25 bps cut at the final meeting of the year in November, with the risk of further reduction early next year, swaps data showed. This, in turn, could exert some selling pressure on the Kiwi against the USD in the near term.
“Further easing seems likely in November – and perhaps beyond given the reference to future ‘reductions’ in the OCR,” said Kelly Eckhold, chief New Zealand economist at Westpac Banking Corp. in Auckland.
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.
