NZD/USD drifts higher above 0.5850, focus on Fedspeak

• NZD/USD gains ground to near 0.5875 in Thursday’s early Asian session.
• Fed’s Bowman said inflation is still elevated and has moved sideways in the last few months, so the Fed needs to be cautious.
• The RBNZ is anticipated to cut its interest rate next week. 

The NZD/USD pair posts modest gains to around 0.5875 during the early Asian session on Thursday. However, the upside for the pair might be limited as investors await Fedspeak for more cues about the Federal Reserve's interest rate outlook and US President-elect Donald Trump's proposed policies.

The US Dollar index (DXY), which measures the greenback against a basket of currencies, currently trades near 106.60 after retracing from a yearly high of 107.06 last week. The growing bets that the Fed may slow its path of interest-rate cuts on concerns Trump's policies could reignite inflation boost the US Dollar (USD) against the Kiwi. 

Economists expect the Fed to cut rates at its December meeting with shallower cuts in 2025 than expected a month ago due to the risk of higher inflation from Trump's policies, according to a Reuters poll. 

Federal Reserve Board of Governors member Michelle Bowman said on Wednesday that inflation is still elevated and moving sideways in the last few months and the US central bank should pursue a cautious approach to monetary policy.

On the Kiwi front, the growing expectations that the Reserve Bank of New Zealand (RBNZ) would cut its Official Cash Rate (OCR) next week might weigh on the New Zealand Dollar (NZD). Markets are fully pricing in a 50 bps reduction, with 12% odds of a larger 75 bps rate cut. ANZ chief economist Sharon Zollner expects the RBNZ to cut its OCR by 50 basis points (bps) next week, bringing the rate to 4.25%. “If there is going to be a surprise, a larger cut seems likelier than a smaller one,” added Zollner.  

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.

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