NZD/USD strengthens to near 0.5850 on US rate cut expectations, Fed independence concerns
- NZD/USD drifts higher to around 0.5845 in Wednesday’s early European session.
- Growing expectations of a US rate cut and concerns over Fed independence weigh on the US Dollar.
- The risk-off mood and safe-haven flows might cap the upside for the pair.
The NZD/USD pair extends its upside to near 0.5845 during the early European session on Wednesday. The US Dollar (USD) weakens against the New Zealand Dollar (NZD) on the prospect of a further interest rate cut by the US Federal Reserve (Fed). The weekly US Initial Jobless Claims data will be published later in the day.
Data released by the Bureau of Economic Analysis on Tuesday indicated that strong growth in the world's largest economy failed to shift sentiment from expectations of Fed interest rate reductions next year. The US economy expanded at a 4.3% annualized pace in the third quarter (Q3). This figure was stronger than the estimates of 3.3% and followed 3.8% growth in Q2.
US President Donald Trump said on Tuesday that he expects his Fed Chair to lower interest rates if the economy is doing well. Trump noted that the next Fed chair will be someone who believes in lower interest rates "by a lot”. He indicated that disagreement with his views would disqualify candidates from consideration for the Fed’s top job. His comments are likely to heighten concerns among investors and policymakers about Fed independence, which could drag the Greenback lower and create a tailwind for the pair.
Nonetheless, the risk-off sentiment amid uncertainty and rising geopolitical tensions could boost the safe-haven currency, such as the USD. The US intensified its attempts to block Venezuela's crude oil supplies. In an effort to disrupt supply and cut off funding for the Maduro regime, the US intercepted two Venezuelan oil tankers in the Caribbean Sea and threatened to seize additional sanctioned boats approaching or departing Venezuela.
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.