NZD/USD depreciates to near 0.5850 due to rising odds of a bumper RBNZ rate cut

• NZD/USD loses ground due to rising expectations of a larger 75 bps rate cut by the RBNZ next week.
• The US Dollar received support from cautious comments by the Fed officials.
• Boston Fed President Susan Collins emphasized the importance of a cautious approach in making policy decisions.

NZD/USD extends its losses for the second consecutive day, trading around 0.5860 during the European hours on Thursday. The New Zealand Dollar (NZD) faces challenges due to growing expectations that the Reserve Bank of New Zealand (RBNZ) could deliver a bumper interest rate cut next week.

On Thursday, New Zealand's Treasury Chief Economic Adviser, Dominick Stephens, said it would likely revise down its economic and fiscal forecasts due to a prolonged slowdown in productivity. This led investors to fully anticipate a 50 basis point (bps) rate cut, with a 12% chance of a larger 75 bps reduction in November’s policy meeting.

UOB Group FX analysts Quek Ser Leang and Lee Sue Ann noted that while the New Zealand Dollar (NZD) may see some upward movement, it is unlikely to reach 0.5960 in the near term. However, as long as the NZD stays above 0.5850, it could gradually rise to 0.5960 over time.

The US Dollar may appreciate further due to the cautious remarks from Federal Reserve (Fed) officials. Additionally, market expectations suggest that the incoming Donald Trump administration will spur inflation, thereby slowing the rate cut trajectory from the Fed, lending support to the Greenback.

Boston Fed President Susan Collins stated on Wednesday that while more interest rate cuts are necessary, policymakers should proceed cautiously to avoid moving too quickly or too slowly, according to Bloomberg. Meanwhile, Fed Governor Michelle Bowman highlighted that inflation remains elevated over the past few months and stressed the need for the Fed to proceed cautiously with rate cuts.

Traders will be closely monitoring the US weekly Initial Jobless Claims, the Philadelphia Fed Manufacturing Index, and Existing Home Sales, all of which are scheduled for release later on Thursday.

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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