NZD/USD recovers slightly from over two-week low; bulls lack conviction above mid-0.5700s

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NZD/USD gains some traction on Monday amid a generally positive risk tone.
The RBNZ’s hawkish tilt further supports the Kiwi amid subdued USD demand.
Rising geopolitical tensions act as a tailwind for the USD and cap spot prices.

The NZD/USD pair attracts some dip-buyers near the 0.5745-0.5740 region during the Asian session on Monday, and for now, seems to have stalled its retracement slide from the highest level since October, touched earlier this month. Spot prices, however, lack bullish conviction and currently trade around the 0.5760 area, up just over 0.5% for the day.

A generally positive tone around the equity markets acts as a tailwind for the risk-sensitive Kiwi amid the Reserve Bank of New Zealand's (RBNZ) hawkish outlook on the future policy path. In fact, RBNZ Governor Ann Breman said last week that the Official Cash Rate (OCR) is likely to remain at its current level of 2.25% for an extended period if economic conditions unfold as expected. This supports the NZD/USD pair amid subdued US Dollar (USD) price action.

The USD Index (DXY) is seen consolidating last week's modest recovery gains from its lowest level since early October, though the downside remains cushioned in the wake of hawkish comments from Federal Reserve (Fed) officials. In fact, Cleveland Fed President Beth Hammack said that monetary policy is in a good place to pause and assess the effects of 75 basis points (bps) of interest rate cuts on the economy during the first quarter, Bloomberg reported on Sunday.

Moreover, rising geopolitical risks could benefit the safe-haven buck and cap the perceived riskier NZD/USD pair. Russian President Vladimir Putin’s top foreign policy aide said on Sunday that changes made by the Europeans and Ukraine to US proposals did not improve prospects for peace. Meanwhile, Israel's Prime Minister Benjamin Netanyahu said that officials are planning to brief US President Donald Trump about options for attacking Iran again.

This comes on top of rising tensions between the US and Venezuela, which, in turn, favors the USD bulls and warrants some caution before placing aggressive bullish bets around the NZD/USD pair. Traders might also refrain from placing aggressive directional bets as trading volumes are expected to remain thin on the back of the year-end holiday season. This makes it prudent to wait for strong follow-through buying before positioning for any further intraday appreciating move.

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.