New Zealand Dollar remains close to one-week top vs USD; looks to US NFP for fresh impetus

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The NZD/USD pair edges higher following the previous day's two-way price moves and trades around the 0.5685 region during the Asian session on Friday.

NZD/USD attracts some dip-buyers and remains close to a one-week top, set on Tuesday.
Fed rate hike bets, along with geopolitical risks, should support the USD and cap the pair.
Traders might also refrain from placing aggressive directional bets ahead of the US NFP.

The NZD/USD pair edges higher following the previous day's two-way price moves and trades around the 0.5685 region during the Asian session on Friday. Spot prices, however, remain below a one-week high, touched on Tuesday, as traders keenly await the US monthly employment details for a fresh impetus.

The popularly known US Nonfarm Payrolls (NFP) report is a crucial driver of the Federal Reserve's (Fed) monetary policy and play a key role in influencing the US Dollar (USD) demand. Stronger data will reaffirm a resilient US labor market and bolster rate hike bets, while a dismal print would temper expectations for a more hawkish Fed. Nevertheless, the crucial report should help investors to evaluate the timing and likelihood of future interest rate changes, which, in turn, will determine the near-term trajectory for the buck and the NZD/USD pair.

Heading into the key data risk, traders have been pricing in around a 64% chance that the US central bank will raise borrowing costs in September and assigning a nearly 85% probability of a move by the end of this year amid sticky inflation. The bets were lifted by data, showing that consumer inflation accelerated to a three-year high in May. Moreover, several Fed officials also indicated that higher interest rates may be necessary to bring inflation back to the central bank's 2% target. This, to a larger extent, offsets Wednesday's unimpressive US data.

The US ADP report revealed that private-sector employment increased by 98K in June, down from the previous month's unrevised 122K and missing consensus estimates for a reading of 113K. Adding to this, the ISM Manufacturing PMI eased to 53.3 in June from 54 in the previous month. The data, however, does little to dent the underlying USD bullish sentiment amid hawkish Fed expectations. Apart from this, geopolitical risks support the safe-haven USD and warrants caution before positioning for a further appreciating move for the NZD/USD pair.

Iran and the US concluded a round of indirect talks in Qatar with no sign that they had made headway toward lasting peace amid tensions over the critical Strait of Hormuz. Separately, Russia launched a barrage of missiles and drones on Ukraine’s capital, Kyiv, early Thursday. This keeps geopolitical risks in play, which favors the USD bulls and should cap the NZD/USD pair. However, the Reserve Bank of New Zealand's (RBNZ) hawkish shift might hold back traders from placing aggressive bearish bets around the New Zealand Dollar (NZD).

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.