New Zealand softens to near 0.5700 despite US-Iran peace progress

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NZD/USD softens to near 0.5705 in Tuesday’s Asian session.
Futures traders have priced in a likely Fed rate hike by the end of this year.
US Vice President hailed ‘great progress’ in US-Iran talks despite ‘threatening’ and ‘whining.’

The NZD/USD pair trades in negative territory for the fifth consecutive day around 0.5705 during the Asian trading hours on Tuesday. The US Dollar (USD) strengthens against the New Zealand Dollar (NZD) on a hawkish tone from the US Federal Reserve (Fed). Traders brace for the preliminary readings of the US S&P Global Purchasing Managers Index (PMI) later on Tuesday.

Traders grapple ‌with rising expectations that the Fed may take more aggressive action to tackle inflation later this year under the leadership of new Chair Kevin Warsh. This, in turn, could provide some support to the Greenback and create a headwind for the pair.

Fed funds futures are pricing nearly an 89% probability of a Fed hike in December, compared with 15.2% chance a week ago, according to the CME Group's FedWatch tool.

On the other hand, the progress of the US-Iran peace deal could boost the riskier assets such as the Kiwi against the USD. Vice President JD Vance said on Monday that negotiations between Washington and Tehran had made “very good progress" but acknowledged there had been “threatening and whining.” This came after Iran said it would close the Strait of Hormuz again because of Israeli strikes on Lebanon.

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.