New Zealand Dollar weakens below 0.5750 as PBOC rates hold, US-Iran talks weigh

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The NZD/USD pair trades in negative territory around 0.5735 during the early Asian session on Monday. The China-proxy New Zealand Dollar (NZD) remains weak following the People’s Bank of China (PBOC) interest rate decision.

NZD/USD weakens to near 0.5735 in Monday’s early Asian session.
China's central bank holds the Loan Prime Rates steady in June.
The US-Iran peace talks took place in Bürgenstock, Switzerland, on Sunday.

The PBOC announced to leave its Loan Prime Rates (LPRs) unchanged on Monday. The one-year and five-year LPRs were at 3.00% and 3.50%, respectively.

Traders will closely monitor the Middle East developments surrounding the US-Iran agreement. Progress on the US-Iran peace deal could support the riskier assets such as the shared currency. On the other hand, signs of a prolonged US-Iran conflict could boost the Greenback as a safe-haven currency.

Last week, the US Federal Reserve (Fed) decided to leave its benchmark interest rate unchanged between 3.50% and 3.75% after Kevin Warsh's first meeting in charge of the central bank. Warsh said during the press conference that “price stability” would be the Fed’s guiding principle.

Futures traders have priced in that the Fed is likely to hike rates by 25 basis points (bps) at its September meeting, with some chance seen of a move as soon as next month’s meeting.

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.