NZD/USD trims losses near 0.6100 ahead of US CPI data
- NZD/USD rebounds to 0.6090 in Thursday’s early Asian session.
- The RBNZ held its policy rate at its July meeting and delivered a less hawkish tone.
- Fed’s Powell said central bank will make interest rate decisions based on data, not in consideration of political factors.
The NZD/USD pair trades on a stronger note around 0.6090 during the early Asian session on Thursday. The pair recovers some lost ground on the weaker US Dollar (USD) after retreating from the weekly high of nearly 0.6155. The release of the US Consumer Price Index (CPI) data for June will be in the spotlight on Thursday.
On Wednesday, the Reserve Bank of New Zealand (RBNZ) decided to hold its Official Cash Rate (OCR) for the eighth consecutive meeting at 5.5%, the highest since December 2008. The board notes a risk that domestically driven inflation could be more persistent in the near term. The central bank expected headline inflation to return to within the 1 to 3% target range in the second half of this year. A less hawkish view on inflation is likely to exert some selling pressure on the Kiwi for the time being.
On the USD’s front, Federal Reserve (Fed) Chair Jerome Powell said on Wednesday that the US central bank would make interest rate decisions based on the data, the incoming data, the evolving outlook, and the balance of risks, and not in consideration of political factors.
Furthermore, Powell emphasized that the Fed will not be appropriate to cut the policy rate until they gain greater confidence in inflation heading sustainably towards the Fed’s 2% target. The cautious stance from the Fed might lift the Greenback in the near term. However, investors will take more cues from the key US inflation report later in the day. The softer CPI inflation reading could trigger the expectation of the Fed rate cuts this year and might weigh on the US Dollar (USD) against the NZD.
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.