NZD/USD remains stronger above 0.5800 due to RBNZ rate hike bets

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NZD/USD gained ground as China’s Retail Sales increased 2.8% YoY in February.
Traders assess the possibility of a Reserve Bank of New Zealand rate hike later this year.
US Dollar weakens as risk aversion eases on reports that the US may announce a coalition to escort ships through Hormuz.

NZD/USD holds gains after four days of losses, trading around 0.5810 during the Asian hours on Monday. The pair remains firm as the New Zealand Dollar (NZD) gains support following the release of key economic data from China. Developments in the Chinese economy often influence the NZD, given the close trade relationship between China and New Zealand.

Data released on Monday by China’s National Bureau of Statistics (NBS) showed Retail Sales increased 2.8% year-over-year (YoY) in February, surpassing expectations of 2.5% and improving from December’s 0.9%. Meanwhile, Industrial Production rose 6.3% YoY during the same period, beating the 5.1% forecast and the previous 5.2% reading.

Traders are also evaluating the possibility of a rate hike by the Reserve Bank of New Zealand (RBNZ) this year. Rising oil prices linked to the ongoing Middle East conflict are beginning to impact New Zealand, driving up petrol prices and airfares.

Some analysts suggest the central bank may need to tighten policy sooner than previously anticipated. Markets are already reflecting this outlook, with investors largely pricing in a 25-basis-point rate hike in September and assigning more than a 70% probability to another increase in December. However, the RBNZ’s own projections indicate that a year-end rate hike is not fully reflected in its outlook, given the country’s weak economic backdrop.

The US Dollar (USD) weakens against its peers as risk aversion eases on reports that the United States (US) may announce a coalition to escort ships through the Strait of Hormuz. Moreover, US Energy Secretary Chris Wright said that he expects the US-Israel conflict with Iran to end within “the next few weeks,” potentially allowing oil supplies to recover and energy prices to decline.

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.