NZD to weaken against the USD over the short to medium-term – HSBC

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NZD/USD slides further to near 0.5900 as RBNZ rate-cut bets surge – Crypto News

Published

2 years ago

July 25, 2024

Dripp

NZD/USD tumbles to near 0.5900 due to multiple headwinds.
China’s battered economy and improved RBNZ rate-cut bets have dampened the New Zealand Dollar’s appeal.
The next move in the US Dollar will be guided by the US Q2 GDP data.

The NZD/USD pair extends its downside to near the round-level support of 0.5900 in Thursday’s European session. The Kiwi asset continues its losing spell for the sixth trading session due to multiple headwinds. Deepening China’s economic woes and increasing Reserve Bank of New Zealand (RBNZ) rate-cut bets have weakened the New Zealand Dollar (NZD).

Weak demand from domestic and the overseas market in the Chinese economy has raised concerns over global growth outlook. The Kiwi Dollar has been hit badly as the New Zealand economy is one of leading trading partners of China.

Adding to China’s economic vulnerability, growing speculation that the RBNZ could pivot to policy normalization from the August policy meeting has weakened the New Zealand Dollar. The expectations for the RBNZ to cut its key Official Cash Rate (OCR) from its current levels in August rose due to cooling inflationary pressures. In the second quarter, inflationary pressures grew at a slower pace of 0.4% from the estimates and the former release of 0.6%. Annually, the price index has decelerated sharply to 3.5%.

Meanwhile, the market sentiment remains risk-off with a focus on the United States (US) Q2 flash Gross Domestic Product (GDP) data, which will be published at 12:30 GMT. S&P 500 futures give up gains posted in Asian trading hours.

The US economy is estimated to have grown at a faster pace of 2.0% from the former release of 1.4% on an annualized basis. The GDP data will significantly influence the US Dollar’s (USD) outlook.

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.