New Zealand Dollar wavers near two-month lows despite a brighter market mood
- NZD/USD remains stuck at two-month lows near 0.5700, unable to take advantage of the positive market sentiment.
- The Kiwi holds losses after having depreciated 4.5% over the last four weeks.
- Fed's hawkishness and geopolitical uncertainty have sent the Kiwi into a tailspin over the last few weeks.
The New Zealand Dollar (NZD) languishes just above two-and-a-half-month lows against the US Dollar (USD), despite a somewhat brighter market mood, as a sustained reversal in Oil prices has eased risk aversion on Monday. The NZD/USD pair, however, remains unable to take any significant distance from the 0.5700 lows hit last week, and holds a 4.5% decline from mid-August highs.
Markets have opened the week in a positive mood, mainly triggered by the lower Oil prices, with the barrel of Brent Crude retreating below the key $100 level and trading at its lowest levels in nearly two weeks, at $97.20. The decline in Oil prices, which have retreated nearly 8% from last week’s highs, provides some relief to the New Zealand economy, which is a net Oil importer.
News reporting that exports from Saudi Arabia increased significantly in September has eased concerns about supply disruptions, accelerating the correction in prices. The Head of the United States Central Command, Admiral Brad Cooper, affirmed this weekend that Oil shipments through the Strait of Hormuz reached their highest levels in the last six months in September, thanks to US naval protection and the clearance of mines in the waterway.
Middle East tensions, Fed hawkishness support the USD
The US Dollar remains buoyed by the hawkish hike delivered by the Federal Reserve (Fed) last week. The US central bank hiked interest rates by 25 basis points, as widely expected. Chairman Kevin Warsh, however, rattled markets with an unequivocal hawkish message, which took investors by surprise and sent the USD surging across the board amid hopes of further tightening ahead.
On the other hand, tensions in the Middle East remain high, as the Houthis attacked Saudi Arabian capital over the weekend and the US and Iran exchanged threats in a conflict that is heading to its seventh month, with no end in sight.
Earlier on the day, the People’s Bank of China left its benchmark interest rate unchanged at 3% for the 16th consecutive time, in line with market expectations. The impact on the Kiwi was minimal.
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.