New Zealand Dollar holds gains around 0.5850, favoured by a softer US Dollar

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The New Zealand Dollar (NZD) has retraced previous losses and extends gains for the third consecutive day against the US Dollar (USD) on Thursday. The NZD/USD pair has reached the 0.5850 area, supported by a weakening Greenback, as markets dial down hopes of a Federal Reserve rate hike in July.

NZD/USD extends gains for the third consecutive day, consolidating around 0.5850.
The USD struggles on Thursday as soft US inflation data has dampened Fed tightening expectations.
The New Zealand Dollar remains bid with investors pricing at least one more RBNZ rate hike this year.

Data released in the US on Wednesday revealed that the Producer Price Index (PPI) contracted 0.3% in June, against expectations of a flat reading, and following a 0.6% increase in May. The yearly PPI eased to 5.5% from 6% in May, rather than accelerating to 6.2% as the market consensus had anticipated.

These figures follow a similarly soft Consumer Prices Index (CPI) release on Tuesday, and have slashed market hopes of a July rate hike to 10%, from 24% one week ago, while the odds for a September hike have been trimmed to 52% from 62% on the previous week, as measured by the CME's FedWatch Tool.

Later in the day, the focus will be on the US Retail Sales, which are expected to have slowed in June, although the control group is seen growing at a solid 0.5% pace. In the current context of ebbing inflationary pressures, signs of weakening consumer demand would dampen Fed tightening hopes further and add bearish pressure on the US Dollar.

The Kiwi, on the other hand, has rallied nearly 3% since the Reserve Bank of New Zealand hiked its Official Cash Rate by 25 basis points last week, and hinted at further monetary tightening in the coming months. Investors are now pricing two further rate hikes this year, which is boosting the Kiwi Dollar against its main peers.

New Zealand Dollar FAQs

What key factors drive the New Zealand Dollar?

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.

How do decisions of the RBNZ impact the New Zealand Dollar?

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.

How does economic data influence the value of the New Zealand Dollar?

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.

How does broader risk sentiment impact the New Zealand Dollar?

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.