NZD/USD drops to near 0.5700 as traders expect RBNZ to deliver a bumper rate cut
- NZD/USD faces challenges as the US Dollar strengthens amid rising Treasury yields.
- Fed Governor Michelle Bowman warned that upside inflation risks persist, stressing the need for more clarity before considering rate cuts.
- The RBNZ is expected to cut its Official Cash Rate by 50 basis points, bringing it down to 3.75%, at Wednesday's meeting.
NZD/USD retreats after three consecutive days of gains, trading around 0.5710 during European hours on Tuesday. The decline is driven by a stronger US Dollar as Treasury yields rise.
The US Dollar Index (DXY), which measures the USD against six major currencies, edges higher to 106.90 after three days of losses. Meanwhile, US Treasury yields stand at 4.27% for the 2-year note and 4.50% for the 10-year note.
On Monday, Federal Reserve Governor Michelle Bowman cautioned about persistent upside risks and emphasized the need for more certainty before considering rate cuts. Fed Governor Christopher Waller acknowledged inflation improvements but noted the slow progress, stressing the importance of data-driven decisions amid policy uncertainty.
However, the NZD/USD pair found some support following US President Donald Trump’s decision to delay reciprocal tariffs. Additionally, a US retail sales report fueled speculation that the Federal Reserve might cut interest rates later this year despite ongoing inflation concerns.
The New Zealand Dollar (NZD) remains under pressure as expectations grow for a significant rate cut by the Reserve Bank of New Zealand (RBNZ) at its Wednesday meeting. The RBNZ is anticipated to slash the Official Cash Rate (OCR) by 50 basis points to 3.75%.
Traders will closely watch RBNZ Governor Adrian Orr’s press conference after the rate decision for insights into the central bank’s future policy stance. Any dovish signals could add to selling pressure on the Kiwi Dollar.
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.