NZD/USD softens below 0.5900 as traders brace for US ISM Services PMI release

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The NZD/USD pair attracts some sellers to around 0.5870 during the early European session on Thursday, pressured by a stronger US Dollar (USD).

NZD/USD weakens to near 0.5870 in Thursday’s early European session.
RBNZ’s dovish policy expectations undermine the New Zealand Dollar.
Traders ramp up bets on Fed rate cuts after the softer-than-expected job openings data.

The NZD/USD pair attracts some sellers to around 0.5870 during the early European session on Thursday, pressured by a stronger US Dollar (USD). Markets turn cautious as traders await the US weekly Initial Jobless Claims, the ADP Employment Change, and the ISM Services Purchasing Managers Index (PMI) later on Thursday.

The Reserve Bank of New Zealand (RBNZ) has been aggressively cutting rates since August 2024 to counteract a fragile recovery that followed a period of aggressive tightening to combat inflation. Additionally, the New Zealand central bank signaled that further cuts could be coming.

Analysts are currently expecting two more rate reductions from the RBNZ, which would bring the Official Cash Rate (OCR) down to 2.50%, the lowest level since mid-2022. The dovish RBNZ’s tone, along with the firmer Greenback, could create a headwind for the NZD/USD pair in the near term.

On the other hand, Wednesday’s economic data showed US job openings fell more than expected, signaling a weakening labor market and reinforcing bets of a rate cut by the Federal Reserve (Fed) later this month. This, in turn, might weigh on the USD and help limit the pair’s losses.

According to the CME FedWatch tool, traders are now pricing in about a 97% chance of the Fed cutting interest rates later this month, up from 91% a week earlier. They are also pricing in 139 basis points (bps) of reductions by the end of next year.

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.