The NZD/USD pair is trading in positive territory near 0.5730 during the early Asian session on Friday. The ongoing US government shutdown and expectations of US interest rate cuts are dragging the US dollar (USD) down against the New Zealand dollar (NZD). Traders will assess comments from Federal Reserve (Fed) officials.
The US federal shutdown will stretch into next week after the Senate failed to advance a Republican bill to extend government aid and end the shutdown for a tenth time on Thursday, the 16th day of the impasse. Fears of a longer shutdown could undermine the Greenback and create tailwinds for the pair.
Furthermore, dovish remarks from Fed policymakers are also weighing on the USD. Fed Governor Christopher Waller said Thursday that he favors another rate cut at the upcoming policy meeting later this month. Meanwhile, the Fed’s newest governor, Stephen Miran, again argued for a more aggressive rate cut than the one favored by his colleagues for 2025
Traders are currently pricing in nearly a 98% chance of a 25 basis point (bps) Fed rate cut in October, followed by another cut in December, which is fully priced in, according to Reuters.
On the other hand, escalating trade tensions between the US and China could dampen the upside for the China proxy Kiwi, as China is a key trading partner for New Zealand. Both countries will impose additional port charges on ships carrying cargo between them. This measure is likely to increase trade costs and disrupt freight flows.
Frequently Asked Questions about 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 largely determined by the health of the New Zealand economy and the country’s central bank policy. Still, there are some unique characteristics that can make the NZD move as well. 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 exports from New Zealand to the country, hitting the economy and thus its currency. Another factor that moves the NZD is dairy prices, as the dairy industry is New Zealand’s main export. High dairy prices increase export earnings and contribute 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 on keeping it close to the 2% midpoint. For this purpose, the bank sets an appropriate interest rate. When inflation is too high, the RBNZ will raise interest rates to cool the economy, but the move will also make bond yields higher, increasing the appeal of investors to invest in the country and thus boosting the NZD. On the contrary, lower interest rates tend to weaken the NZD. The so-called interest rate differential, or how rates in New Zealand are or are expected to be compared to those 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 assessing the state of the economy and can affect the New Zealand dollar (NZD) valuation. A strong economy based on high economic growth, low unemployment and high confidence is good for the NZD. High economic growth attracts foreign investment and could prompt New Zealand’s Reserve Bank to raise interest rates if this economic strength comes together with elevated inflation. Conversely, if economic data is weak, the NZD is likely to fall.
The New Zealand dollar (NZD) tends to strengthen during periods of risk, or when investors perceive broader market risks to be 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, the NZD tends to weaken in times of market turmoil or economic uncertainty as investors tend to sell higher risk assets and flee to the more stable safe havens.