NZD/USD weakens to near 0.5750 as traders brace for Fed rate decision
- NZD/USD softens to near 0.5750 in Wednesday’s Asian session.
- The Fed is expected to announce a 25 bps rate cut on Wednesday, bringing the rates to 4.25%-4.50%.
- New Zealand’s Current Account deficit narrowed as the country imported less.
The NZD/USD pair remains on the defensive around 0.5750 during the early Asian session on Wednesday. The New Zealand Dollar (NZD) struggles to gain ground as traders await the US Federal Reserve (Fed) interest rate decision on Wednesday.
The mixed US economic data released on Tuesday had no impact on expectations that the Fed would cut interest rates at its December meeting on Wednesday. Traders have priced in a 25 basis points (bps) interest rate cut at the December meeting but lean toward a pause in January 2025. The Press Conference and the Summary of Economic Projections, or ‘dot-plot’ will be closely watched. The cautious tone about further cuts could lift the US Dollar (USD) and act as a headwind for NZD/USD.
The Retail Sales in the US came in better than the market expectation, rising 0.7% MoM in November versus a 0.5% increase (revised from 0.4%) prior, the US Census Bureau showed Tuesday. Meanwhile, Industrial Production contracted by 0.1% MoM in November, compared to a fall of 0.4% (revised from -0.3%) in October, missing the estimation of the 0.3% expansion.
New Zealand’s current account deficit narrowed to $10.581B in the third quarter from $4.826B in the previous reading, according to Statistics New Zealand on Wednesday. Meanwhile, the potential Donald Trump’s tariff policies could drag the Kiwi lower, as Trump said that he will impose a 10% tariff on imports from China.
Additionally, Chinese Retail Sales missed expectations in November, adding to pressure on policymakers after President Xi Jinping signaled last week that he wanted to boost household consumption. The renewed concerns surrounding China's economy weigh on the Kiwi as China is a major trading partner for New Zealand.
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.