NZD/USD moves above 0.5650 due to rising odds of Fed keeping rates unchanged in January
- NZD/USD receives upward support from the increased likelihood that the Fed will adopt gradual policy easing in 2025.
- The CME FedWatch tool indicates a nearly 90% probability that the Federal Reserve will keep interest rates unchanged in January.
- The NZD may depreciate as the RBNZ is widely expected to deliver a 50 basis point rate cut in February.
NZD/USD extends its gains for the second consecutive day, trading around 0.5660 during the Asian session on Monday. The NZD/USD pair gains ground as the US Dollar (USD) remains subdued following the Personal Consumption Expenditures Price Index (PCE) data from the United States (US).
The inflation report showed that core PCE inflation year-over-year, the Fed’s preferred inflation measure, rose steadily by 2.8% in November, slower than estimates of 2.9%. The monthly core inflation grew moderately by 0.1%, against estimates of 0.2% and the prior release of 0.3%.
Moderate growth in US inflation reinforced the market expectations that the Federal Reserve (Fed) will adopt a slower pace of additional cuts in 2025. According to the CME FedWatch tool, markets now anticipate a more than 90% probability that the Federal Reserve (Fed) will keep interest rates unchanged in January, maintaining the current range of 4.25%–4.50%.
The upside potential for the New Zealand Dollar (NZD) could be limited, as weaker-than-expected GDP data for Q3 has pushed New Zealand into its deepest recession since the initial COVID-19 slump in 2020. This has increased expectations for more aggressive monetary policy easing by the Reserve Bank of New Zealand (RBNZ). Markets have fully priced in a substantial 50 basis point rate cut at the RBNZ’s February meeting.
New Zealand's GDP contracted by 1.0% quarter-over-quarter in Q3, slightly improving from the revised 1.1% contraction in Q2 but worse than the anticipated 0.4% decline. On an annual basis, GDP shrank by 1.5% in Q3, a sharper decline compared to the previous 0.5% contraction and well below the expected 0.4% drop.
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.