NZD/USD strengthens above 0.6250, eyes on geopolitical risks

• NZD/USD edges higher to around 0.6285 in Wednesday’s early Asian session. 
• The US ISM Manufacturing PMI came in worse than expected in September. 
• The RBNZ is expected to cut its cash rate by 50 basis points.

The NZD/USD pair gathers strength near 0.6285 despite the firmer US Dollar (USD). Nonetheless, the cautious mood in the market amid the escalating tension in the Middle East could lift the Greenback. Investors will keep an eye on the US ADP Employment Change and Fedspeak. 

The weaker-than-expected US economic data caps the Greenback’s upside. The ISM Manufacturing PMI for September remained steady at 47.2 in September, unchanged from the previous reading, but missing estimates of 47.5. This figure was below the 50% threshold for the sixth consecutive month.

Iran launched over 200 ballistic missiles at Israel and Prime Minister Benjamin Netanyahu vows to retaliate against Iran for the missile attack on Tuesday, but Tehran warned that any response would result in "vast destruction, fuelling fears of a wider war. The rising geopolitical risks could support the US dollar (USD), a safe-haven currency. 

On the Kiwi front, HSBC analysts expect more aggressive interest rate cuts from the Reserve Bank of New Zealand (RBNZ),in the upcoming months due to signs of a slowing economy. The bank anticipate the RBNZ to lower its cash rate by 50 basis points (bps) in both October and November, a change from its previous prediction of 25bp cuts in each of the two months. This, in turn, might cap the upside for the Kiwi in the near term. 

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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