NZD/USD gains ground to near 0.5750 on softer Iran rhetoric

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NZD/USD gathers strength to near 0.5750 in Friday’s Asian session.
Trump signals a wait-and-see approach after earlier threats of intervention.
Traders believe the near-term RBNZ interest rate hikes will remain low.

The NZD/USD pair attracts some buyers to around 0.5750 during the Asian trading hours on Friday. The New Zealand Dollar (NZD) edges higher against the US Dollar (USD) as easing tensions in Iran boost the riskier currencies. Later in the day, the US December Industrial Production report will be released. Also, Federal Reserve (Fed) Governor Michelle Bowman is scheduled to speak.

US President Donald Trump said on Thursday that he had been told that killings in Iran's crackdown on protests appeared to be easing and saw no immediate plan for large-scale executions. Trump hasn’t taken any options off the table, saying that there will be “grave consequences” if killings continue. His softer tone on Iran could provide some support to the riskier currencies, such as the Kiwi, in the near term.

On the other hand, rising expectations that the US central bank will hold the interest rates in the next several months might lift the Greenback and act as a headwind for the pair. The US Initial Jobless Claims and robust Retail Sales released this week prompted traders to push back bets for the next rate cut to June.

While the Reserve Bank of New Zealand (RBNZ) signaled that its easing cycle likely ended last year after a cumulative 225 basis points (bps) of rate cuts, market pricing indicates almost no chance of a rate hike at the February policy meeting. Traders expect only a small probability of a move until at least September.

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.