The NZD/USD pair has weakened around 0.5945 in Wednesday’s early Asian session, marking a 0.25% decrease on the day. This downward movement can be attributed to rising expectations of rate cuts by the Reserve Bank of New Zealand (RBNZ) and sluggish Chinese economic activity. The market sentiment has turned risk-off, leading to a modest rebound of the Greenback, which is dragging the pair to its lowest level since May 2.
According to UBS analyst, the Federal Reserve is expected to cut rates by 25 basis points in both the September and December FOMC meetings. This is further reinforced by the nearly 96% chance of a Fed rate cut in September, as indicated by the CME FedWatch Tool. The anticipation of the Fed rate cut is putting pressure on the Greenback, which could potentially limit the downside for the NZD/USD pair.
The New Zealand Dollar, also known as the Kiwi, is influenced by a variety of factors. The performance of the Chinese economy has a significant impact on the Kiwi, as China is New Zealand’s largest trading partner. Any negative news regarding the Chinese economy could result in reduced exports to China, negatively impacting the New Zealand economy and its currency.
RBNZ Policy and Interest Rates
The Reserve Bank of New Zealand aims to maintain an inflation rate between 1% and 3% over the medium term, with a focus on keeping it near the 2% midpoint. To achieve this goal, the RBNZ adjusts interest rates accordingly. Higher interest rates can strengthen the NZD by attracting investors seeking higher yields, while lower interest rates tend to weaken the currency.
Economic Data Impact
Macroeconomic data releases in New Zealand play a crucial role in assessing the state of the economy and impacting the valuation of the NZD. A strong economy with high economic growth, low unemployment, and high confidence is beneficial for the NZD. Conversely, weak economic data is likely to lead to depreciation of the currency.
Market Sentiment and Risk
The NZD tends to strengthen during risk-on periods when investors are optimistic about growth and perceive lower market risks. This positivity can lead to a more favorable outlook for commodities and commodity currencies like the Kiwi. Conversely, the NZD weakens during market turbulence or economic uncertainty, as investors tend to sell higher-risk assets and seek out safe havens.
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