New Zealand Dollar remains flat below 0.5850 due to increased risk aversion

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NZD/USD remains flat after experiencing volatility, hovering around 0.5830 during the Asian hours on Wednesday. The pair maintains its position with a bearish tilt as the US Dollar (USD) receives support from safe-haven flows.

NZD/USD maintains its position after experiencing volatility as the US Dollar remains firm amid safe-haven flows.
Risk aversion followed fresh threats from President Trump regarding potential military strikes to resume attacks on Iran.
The PBOC held its Loan Prime Rates steady, keeping the one-year LPR at 3.00% and the five-year at 3.50%.

This increase in risk aversion followed fresh threats from US President Donald Trump regarding potential military strikes on Iran. US President Donald Trump recently threatened to resume attacks on Iran in two or three days as part of a push for a deal to end the war. This came after a brief pause in planned hostilities following a new proposal by Tehran to end the US-Israeli conflict, per Bloomberg. Meanwhile, an Iranian official stated that the US threat of a massive assault would be met resolutely, asserting that Iran is fully prepared to confront any military aggression.

US inflation risks are also rising due to these war-driven energy price pressures, with earlier spikes in oil reinforcing expectations that the Federal Reserve (Fed) may need to maintain higher interest rates for longer or even tighten policy further. Traders are pricing in a 40.1% probability that the Fed will raise interest rates by 25 basis points (bps) by year-end, according to the CME FedWatch tool.

On the monetary policy front, Federal Reserve Bank of Philadelphia President Anna Paulson noted that current policy is mildly restrictive, which is helping to keep inflation pressures in check while maintaining a stable labor market. Paulson indicated that the current policy rate is suitable for applying downward pressure on inflation, though an appropriate rate increase remains possible if economic growth exceeds potential or if new inflation threats arise.

Traders weighed the People’s Bank of China’s (PBOC) decision to hold its benchmark lending rates steady, looking for clues on the economic outlook of New Zealand's top trading partner following a string of disappointing Chinese data on Monday.

The PBOC left its Loan Prime Rates (LPRs) unchanged for the 12th consecutive month in May, as widely expected. The one-year LPR, which anchors most corporate and household loans, remains at 3.00%, while the five-year LPR, the benchmark for mortgage pricing, was held at 3.50%.

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.