NZD/USD extends upside to near 0.5950 amid hopes for Fed jumbo rate cut

POPULAR ARTICLES

NZD/USD drifts higher to around 0.5950 in Tuesday’s early Asian session.
The chance of a jumbo rate cut rises after a dismal US August jobs report.
RBNZ’s dovish expectations might cap the upside for the pair.

The NZD/USD pair extends the rally to near 0.5950 during the early Asian session on Tuesday. The New Zealand Dollar (NZD) strengthens against the US Dollar (USD) due to rising expectations of a jumbo rate cut by the US Federal Reserve (Fed). Traders will keep an eye on the US August Producer Price Index (PPI) report, which is due later on Wednesday.

The recent US Nonfarm Payroll (NFP) showed that the US economy added 22,000 jobs in August. This was significantly lower than the 75,000 jobs expected and followed a revised increase of 79,000 in July. The Unemployment Rate edged up to 4.3% in August from 4.2% in July, as projected.

Traders ramp up their bets on an extra rate reduction by the Fed as the labor market continues to weaken. Fed funds futures are currently pricing in nearly a 90% possibility of a 25 basis points (bps) cut this month and a 10% odds of a 50 bps rate cut, according to LSEG estimates.

The upcoming US inflation report later this week will be closely watched. The headline PPI is expected to show an increase of 3.3% YoY in August, while the core PPI is projected to show a rise of 3.5% during the same period. This figure will be crucial in shaping the Fed's future policy decisions. If the report shows hotter-than-expected inflation, this could boost the Greenback and create a headwind for the pair.

A dovish tone from the Reserve Bank of New Zealand (RBNZ) might weigh on the Kiwi. The RBNZ cut the Official Cash Rate (OCR) to 3.0% at its August meeting, driven by a stalled economic recovery. The New Zealand central bank stated that there is scope to lower the OCR further if medium-term inflation pressures continue to ease as expected.

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.