NZD/USD trims gains below 0.6100 ahead of US PPI data
- NZD/USD trades on a weaker note around 0.6090 in Friday’s early Asian session.
- Odds of Fed rate cuts are growing after the softer-than-expected June US CPI inflation report.
- The RBNZ's dovish monetary policy statement undermines the Kiwi against the USD.
The NZD/USD pair trims gains near 0.6090 during the early Asian session on Friday. The pair loses traction after retreating from the previous session high of nearly 0.6135. Later on Friday, investors will keep an eye on the US June Producer Price Index (PPI) and the preliminary Michigan Consumer Sentiment gauge.
Data released by the US Bureau of Labor Statistics (BLS) on Thursday showed that the US Consumer Price Index (CPI) rose 3.0% on a yearly basis in June, compared to a rise of 3.3% in May. This reading came in below the market consensus of 3.1%. Meanwhile, the annual core CPI, which excludes volatile food and energy prices, climbed 3.3% YoY in June, below the forecast and May's increase of 3.4%. On a monthly basis, the CPI declined 0.1%, while the core CPI was up 0.1%.
The softer US inflation data has triggered the expectation that the US Federal Reserve (Fed) would lower its borrowing costs this year, which might weigh on the US Dollar (USD) in the near term. Investors are now pricing in a nearly 89% chance of a September Fed meeting rate cut, from 73% on Wednesday and around 50% a week ago, according to CME Group’s FedWatch Tool.
On the other hand, a less hawkish stance of the Reserve Bank of New Zealand (RBNZ) is likely to exert some selling pressure on the New Zealand Dollar (NZD) for the time being. The central bank left its Official Cash Rate (OCR) unchanged for the eighth consecutive meeting at 5.5% on Wednesday, as expected but hinted at possible rate cuts in August if inflation decreases as expected.
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.