NZD/USD is losing value after two days of gains, reaching a level of around 0.5690 on Monday during Asian hours. The pair is losing value as the New Zealand dollar (NZD) weakens following the ANZ global commodity price index, which fell 1.0% in June on easing tensions in the Middle East and lower oil prices.
The New Zealand dollar faces an immediate challenge as NZIER economists look past immediate disagreements over forecasts of higher interest rates in the coming year. While opinion is almost evenly divided on the upcoming July policy decision in the Shadow Council, creating real uncertainty and potential volatility in the market, its medium-term prospects remain united. Regardless of the immediate decision, members strongly agree that the Official Cash Rate (OCR) must rise to a range of 3.00% to 3.25% over the next twelve months, establishing a solid anchor for interest rate expectations.
In line with this hawkish medium-term trajectory, ANZ expects the Reserve Bank of New Zealand (RBNZ) to raise OCR by 25 basis points to 2.50% next Wednesday. Despite the keen decline in global oil prices, ANZ maintains that persistent inflation risks and a weakening domestic currency require immediate action. They argue that a neutral to dovish interest rate hike provides the RBNZ with the most comfortable tactical footing to deal with current economic pressures without undue market disruption.
The NZD/USD pair is losing ground as the US dollar (USD) rises as investors expect multiple Federal Reserve (Fed) interest rate increases later this year. This is despite easing concerns about global inflation, helped by the normalization of oil flows through the critical Strait of Hormuz.
The CME FedWatch tool shows that financial markets are pricing in a 77.3% chance of an interest rate augment by the end of the year. Investors are eagerly awaiting Wednesday’s release of minutes from the Fed’s June policy meetings to gain clearer insight into the future path of interest rates.
New Zealand Dollar FAQs
The New Zealand Dollar (NZD), also known as the Kiwi, is a well-known currency among investors. Its value is largely determined by the condition of the New Zealand economy and the policy of the country’s central bank. Still, there are some unique features that can also cause the NZD to move. The performance of the Chinese economy tends to move Kiwis because China is New Zealand’s largest trading partner. Bad news for the Chinese economy is likely to mean fewer New Zealand exports to the country, which hits the economy and therefore the currency. Another factor influencing NZD is dairy prices, as the dairy industry is New Zealand’s main export. High dairy product prices augment export earnings, positively impacting the economy and therefore NZD.
The Reserve Bank of New Zealand (RBNZ) aims to achieve and maintain an inflation rate of 1% to 3% over the medium term, with particular emphasis on keeping it close to the average level of 2%. For this purpose, the bank sets the appropriate level of interest rates. When inflation gets too high, the RBNZ will raise interest rates to nippy the economy, but this move will also push up bond yields, making it more attractive for investors to invest in the country and therefore strengthening New Zealand’s currency. On the contrary, lower interest rates tend to weaken NZD. The so-called interest rate differential, which is how New Zealand rates are or are expected to be compared to those set by the US Federal Reserve, could also play a key role in the movement of the NZD/USD pair.
Macroeconomic data releases in New Zealand are key to assessing the state of the economy and may impact the valuation of the New Zealand dollar (NZD). NZD is well served by a mighty economy, underpinned by high economic growth, low unemployment and high confidence. High economic growth attracts foreign investment and may prompt the Reserve Bank of New Zealand to raise interest rates if this economic strength is accompanied by increased inflation. Conversely, if economic data is tender, NZD will likely lose value.
The New Zealand dollar (NZD) tends to strengthen during periods of increased risk or when investors perceive that broader market risk is low and are positive about growth. This tends to lead to a more favorable outlook for commodities and so-called “commodity currencies” such as the kiwi. On the other hand, NZD tends to weaken during periods of market turmoil or economic uncertainty as investors tend to sell higher risk assets and flee to more stable unthreatening havens.
