NZD/USD drops to near 0.6200 due to rising odds of an aggressive rate cut by the RBNZ

• NZD/USD continues to lose ground as the RBNZ is widely expected to deliver a 50 basis point rate cut in October.
• HSBC and BNZ expect the RBNZ to lower its cash rate by 50 basis points next week.
• The US Dollar received support as recent US data faded the dovish sentiment surrounding the Fed’s policy outlook.

NZD/USD extends its losing streak, trading around 0.6200 during the early European hours on Friday. This downside of the pair could be attributed to dovish sentiment surrounding the Reserve Bank of New Zealand's (RBNZ) monetary policy stance next week. RBNZ is widely expected to deliver a 50 basis point interest rate cut amid concerns over weak economic growth and rising unemployment.

HSBC analysts expect the Reserve Bank of New Zealand (RBNZ) to lower its cash rate by 50 basis points in both October and November, revising their previous forecast of 25 basis point cuts for each month. Similarly, the Bank of New Zealand (BNZ) is also forecasting a 50 basis point cut from the RBNZ next week, citing disinflationary data as a key factor that could prompt the central bank to accelerate its easing measures.

The risk-sensitive NZD/USD pair could struggle due to safe-haven flows amid escalating Middle-East tensions. US President Joe Biden stated that the United States (US) is in discussions with Israel about potential strikes on Iran's Oil infrastructure. Israeli Prime Minister Benjamin Netanyahu warned that Iran "will pay a heavy price" for Tuesday’s attack, which involved the firing of at least 180 ballistic missiles at Israel, according to the BBC.

The US Dollar (USD) received support from better-than-expected US ISM Services PMI and ADP Employment Change data released this week. These reports have challenged dovish expectations for Federal Reserve (Fed) monetary policy.

Federal Reserve Bank of Chicago President Austan Goolsbee said on Thursday that the interest rates need to come down over the next year by “a lot.” Goolsbee further stated that he’d like to keep the unemployment rate at 4.2% and prevent it from rising any further.

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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