NZD/USD weakens to near 0.5750 as traders await US PCE inflation release

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NZD/USD loses ground to near 0.5765 in Friday’s early Asian session.
Markets are anticipating a 25 basis point interest rate cut from the Fed next week.
Traders brace for the delayed US PCE inflation data on Friday for fresh impetus.

The NZD/USD pair edges lower to around 0.5765 during the early Asian trading hours on Friday, pressured by the rebound in the US Dollar (USD). Nonetheless, the potential downside for the pair might be limited amid rising bets for a rate cut by the Federal Reserve (Fed) next week. Traders will take more cues from the US delayed Personal Consumption Expenditures (PCE) Price Index report for September, which is due later on Friday.

The US central bank is likely to reduce its key interest rate at its December meeting next week after a cooling labor market and dovish remarks from Fed officials like New York Fed President John Williams and Fed Governor Christopher Waller. Fed funds futures traders are now pricing in nearly an 89% chance of a rate reduction next week, up from 71% probability a week ago, according to the CME FedWatch Tool.

On the Kiwi front, the Reserve Bank of New Zealand (RBNZ) decided to cut its Official Cash Rate (OCR) by a quarter percentage point to 2.25% last week, as widely expected. The New Zealand central bank signaled that future rate changes will depend on the economic and inflation outlook, and analysts believe the rate-cutting cycle is likely finished for now. This, in turn, could provide some support to the New Zealand Dollar (NZD) against the Greenback.

The US delayed PCE inflation data will be in the spotlight later in the day, which could give some insight into the US interest rate path. The headline PCE is expected to show an increase of 2.8% YoY in September, while the core PCE is projected to show a rise of 2.9% during the same period. In case of a hotter-than-expected inflation reading, this could boost the USD and create a headwind for the pair in the near term.

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.