NZD/USD softens to near 0.5750 on US Dollar rebound, Fed rate cut bets might cap losses

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The NZD/USD pair edges lower to near 0.5765 during the early Asian trading hours on Thursday, bolstered by renewed US dollar (USD) demand. Nonetheless, the potential downside for the pair might be limited amid the prospect of the US interest rate cut next week.

NZD/USD loses ground to around 0.5765 in Thursday’s early Asian session.
The downtick of the pair is pressured by the rebound in the US Dollar.
A hawkish shift by the RBNZ could support the Kiwi.

The Greenback recovers some lost ground against the New Zealand Dollar (NZD) after reaching a nearly two-month low on Thursday. The rebound in the USD could be short-lived, as weaker US private payrolls data have boosted expectations of an interest rate cut by the US Federal Reserve (Fed) at the December policy meeting.

Financial markets are currently pricing in nearly an 85% odds of a 25 basis point (bps) rate reduction next week, according to the CME FedWatch tool.

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 anticipated. 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, might contribute to the NZD’s upside.

All eyes will be on the delayed US September Personal Consumption Expenditures (PCE), the Fed’s preferred inflation gauge, and inflation data later on Friday. This report 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 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.

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