New Zealand Dollar sticks to positive bias as Iran peace deal undermines USD ahead of FOMC

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The NZD/USD pair trades with a positive bias for the second consecutive day on Wednesday, though it lacks bullish conviction and remains below mid-0.5800s through the Asian session.

NZD/USD attracts buyers for the second day as the US-Iran peace deal undermines the USD.
The RBNZ’s hawkish outlook acts as a tailwind for the NZD and further supports spot prices.
Bulls now seem hesitant and opt to wait for the FOMC rate decision before placing fresh bets.

The NZD/USD pair trades with a positive bias for the second consecutive day on Wednesday, though it lacks bullish conviction and remains below mid-0.5800s through the Asian session. Traders now seem hesitant and opt to wait for the outcome of a two-day FOMC meeting before positioning for a firm near-term direction.

The US Federal Reserve (Fed) is scheduled to announce its decision later during the US session and is widely expected to keep interest rates unchanged. The central bank is also anticipated to remove the easing bias from the accompanying statement as inflation is proving to be stickier than anticipated. Apart from this, the focus will be on updated economic projections, including the so-called dot plot, and comments from the new Fed Chair, Kevin Warsh, which will be scrutinized for further cues about the future policy path. The outlook, in turn, will play a key role in influencing demand for the US Dollar (USD) and providing some meaningful impetus to the NZD/USD pair.

Heading into the key central bank event risk, the optimism over an interim peace deal between the US and Iran keeps the safe-haven USD on the back foot. Meanwhile, Statistics New Zealand reported that the seasonally adjusted current account deficit narrowed to NZ$1.01 billion in the March quarter, down from a downwardly revised NZD 5.64 billion in the previous quarter. This, along with the Reserve Bank of New Zealand's (RBNZ) abrupt hawkish shift, might continue to support the New Zealand Dollar (NZD) and back the case for further appreciation for the NZD/USD pair.

In fact, the RBNZ's forecast strongly projects a 25 basis points (bps) rate increase at the upcoming July 8 meeting and indicated that the OCR could reach roughly 2.85% by the end of this year, implying up to three rate hikes. This, in turn, favors the NZD/USD bulls, suggesting that any corrective pullback might continue to attract some dip-buyers and remain limited.

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.