The New Zealand dollar is on the rise as market sentiment leans towards riskier assets. This trend is fueled by hopes of central banks worldwide cutting interest rates, boosting confidence in commodity currencies like the New Zealand Dollar, and dampening demand for safe-haven assets.
Positive market sentiment is reflected in the performance of European stocks, with major indices like the German DAX, British FTSE 100, Italian IT40, and Spanish IBEX posting gains. Although the French CAC40 experienced a slight decline due to data indicating a wider-than-expected government budget deficit in France, overall market optimism prevails.
Despite this upward momentum, the New Zealand dollar faces challenges from underlying economic fundamentals. Recent data revealed that the New Zealand economy entered a technical recession in the fourth quarter of 2024, while headline inflation remained high at 4.7%, albeit lower than the previous quarter’s 5.6%.
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The Reserve Bank of New Zealand (RBNZ) is cautious about cutting interest rates, despite sluggish economic growth. High inflation, fueled in part by structural factors like a tight labor market and persistent wage inflation, complicates the RBNZ’s policy decisions. Chief Economist Paul Conway reiterated the bank’s stance on maintaining high interest rates to combat inflation in a recent speech.
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From a technical standpoint, the New Zealand dollar is experiencing a pullback within a short-term downtrend against the US dollar (NZD/USD). The pair’s breakout from a wedge pattern suggests further downside potential, with technical analysis indicating conservative targets around 0.5964 and 0.5892. Additionally, the formation of an ABC pattern, or measured move, on the daily chart suggests a long-term target at 0.5864, contingent on the completion of wave C.
However, a break above the March 21 high at 0.6107 would challenge the bearish bias and potentially alter the outlook for NZD/USD.
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.