New Zealand Dollar holds gains near 0.5800, unfazed by risk aversion
- NZD/USD rushes forward on Tuesday and reaches three-and-a-half-week highs, just below 0.5800.
- Hawkish comments by RBNZ's Conway and upbeat Chinese Trade Balance data have boosted the Kiwi.
- The US Dollar remains supported by rising hopes of near-term Fed rate hikes.
The New Zealand Dollar (NZD) appreciates against the US Dollar (USD) on Tuesday, hardly affected by the risk-averse scenario. Investors’ bets on further rate hikes by the Reserve Bank of New Zealand (RBNZ) and bright data from China are offsetting market concerns about the economic impact of the Middle East conflict for now.
The NZD/USD pair has resumed its near-term bullish trend on Tuesday, after a mild pullback on Monday, as RBNZ official Paul Conway affirmed that the bank will have to “act more firmly to re-anchor inflation expectations". These comments endorse the hawkish stance of the last RBNZ monetary policy statement and hint at further rate hikes in the coming months.
China's Trade surplus beats expectations
Beyond that, data from China, a key partner of New Zealand, beat expectations. China’s Trade Balance surplus widened to USD 125.62 billion in June from USD 105.43 billion in May, beating expectations of a USD 121 billion surplus.
The US Dollar, on the other hand, remains supported by hawkish comments from Federal Reserve (Fed) Governor Christopher Waller, which is weighing on Kiwi’s recovery. Waller affirmed on Monday that the central bank will be forced to hike rates in the near-term if inflation remains above the 2% target.
And that is actually what is expected to happen later on the day. June’s Consumer Price Index (CPI) is seen easing to a 3.8% year-over-year (Y-o-Y) rate, from 4.2% in May, while the core CPI is seen growing at a 2.9% pace, unchanged from the previous month.
In this context, Fed Chairman Kevin Warsh will face the first of the two hearings before the US Congress, where he is likely to be questioned about the bank’s plans to fight inflation. Warsh does not like to provide further guidance, but his comments at these hearings are likely to provide some hints about the bank’s rate path.
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.
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