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12 Sep 2024
NZD/USD rises to near 0.6150 due to rising odds of a smaller Fed rate cut
- NZD/USD gains ground due to risk-on mood following August’s US Consumer Price Index data released on Wednesday.
- The headline US inflation dropped to a three-year low, increasing the odds of a Fed 25 basis points rate cut.
- The upside of the Kiwi Dollar could be limited as RBNZ may implement additional rate cuts by the end of 2024.
NZD/USD retraces its recent losses registered in the previous session, trading around 0.6150 during the Asian hours on Thursday. The upside of the NZD/USD pair could be attributed to improved risk sentiment amid rising expectations of a 25-basis points rate cut by the Fed in September.
August’s US Consumer Price Index (CPI) data showed that headline inflation dropped to a three-year low, although core inflation exceeded expectations. This development has heightened the likelihood that the Federal Reserve (Fed) will begin its easing cycle with a 25-basis points interest rate cut in September.
The US Consumer Price Index dipped to 2.5% year-on-year in August, from the previous reading of 2.9%. The index has fallen short of the expected 2.6% reading. Meanwhile, headline CPI stood at 0.2% MoM. Core CPI ex Food & Energy, remained unchanged at 3.2% YoY. On a monthly basis, core CPI rose to 0.3% from the previous 0.2% reading.
According to the CME FedWatch Tool, markets are fully anticipating at least a 25 basis point (bps) rate cut by the Federal Reserve at its September meeting. The likelihood of a 50 bps rate cut has sharply decreased to 15.0%, down from 44.0% a week ago.
In New Zealand, Electronic Card Retail Sales edged up by 0.2% month-on-month in August, recovering from a 0.1% decline in the previous month. Year-on-year, electronic card transactions fell by 2.9%, improving from a 4.9% decrease in the prior month. Additionally, the monthly Food Price Index rose by 0.2% in August, down from a 0.4% increase in July.
The Reserve Bank of New Zealand (RBNZ) began its easing cycle in August with a 25 basis point cut to interest rates. The RBNZ is anticipated to implement additional rate cuts at each of its remaining two meetings this year. Market expectations suggest that the current cash rate of 5.25% could decline to 3.0% by the end of 2025.
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.