New Zealand Dollar declines as US Dollar gains on hawkish Fed outlook
- NZD/USD loses ground as the US Dollar recovers daily losses following hawkish remarks from Fed Chair Kevin Warsh.
- Fed Chair Warsh stressed that prolonged high inflation and unimpressive summer data warrant a tighter monetary policy stance.
- New Zealand's August trade deficit narrowed to NZD 1.35 billion, down from July's NZD 2.12 billion but above forecast estimates.
NZD/USD depreciates after posting gains the previous day, trading around 0.5720 during the early European hours on Friday. The pair loses ground as the US Dollar (USD) recovers its daily losses due to hawkish comments from Federal Reserve Chair Kevin Warsh.
Fed Chair Warsh highlighted that inflation remains uncomfortably high and pointed out that recent economic data over the summer failed to reflect meaningful structural progress. In response to his statements, interest rate expectations adjusted quickly; the CME FedWatch tool indicates that market participants are now pricing in a 53.1% probability of a rate hike at the October Fed meeting, up from 44% a day earlier.
Dollar momentum cools as oil steadies and markets eye Trump’s Gulf talks
Strategists at ING note that “moderating oil prices have taken the edge off the Dollar’s post-FOMC momentum,” with energy markets appearing to draw some support from political developments. ING points out that energy markets “may be gaining some optimism that Tuesday’s reported meeting between US President Donald Trump and the Gulf States during the UN General Assembly could yield some clarity about plans for the region.” The bank adds that media speculation “also points to Trump nearing a major decision on whether to escalate military operations or pursue an end to the conflict,” a binary outcome that could prove pivotal for regional risk sentiment and, by extension, near-term Dollar dynamics.
However, the New Zealand Dollar may gain tailwinds as investors price in a 60% chance that the Reserve Bank of New Zealand will lift its official cash rate to 3.0% at its upcoming October policy review.
On the economic data front, New Zealand's monthly trade balance posted a deficit of NZD 1.35 billion in August. While this represents a narrow improvement over July's NZD 2.12 billion gap, it missed expectations of a smaller NZD 1.275 billion shortfall. August exports climbed 15.4% year-on-year to reach NZD 6.66 billion, improving on July's downwardly revised 10.8% expansion. Simultaneously, imports increased 13.1% annually to NZD 8.0 billion, moderating from a sharp 28.4% jump in the prior month.
New Zealand Dollar FAQs
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.
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.
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.
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.