Market Data 
- NZD/USD gains momentum to around 0.5655 in Monday’s early European session.
- RBNZ dovish bets might undermine the Kiwi, but fresh Chinese stimulus measures could help limit its losses.
- The Fed hinted it probably would cut rates twice more next year.
The NZD/USD pair climbs to near 0.5655 during the early European session on Monday. Nonetheless, the expectations of more aggressive monetary easing by the Reserve Bank of New Zealand (RBNZ) might cap the upside for the Kiwi. The markets are likely to trade in a quiet session amid light post-holiday trading.
The New Zealand Dollar (NZD) remains under strong bearish pressure due to the dovish bets from the RBNZ. Currently, markets are now pricing in a nearly 65% probability that the New Zealand central bank will lower the cash rate by 50 basis points (bps) to 4.25% at its February meeting.
However, the latest in a series of Chinese government measures aimed at increasing private consumption might boost the China-proxy Kiwi as China is a major trading partner for New Zealand. China’s central government stated that it will offer handouts to people struggling with the cost of living and vowed more benefits for some unemployed people ahead of a key national holiday, Xinhua News Agency reported, citing a notice from the Ministry of Civil Affairs.
On the USD’s front, the Federal Reserve (Fed) lowered the interest rates at its December meeting, as expected, but Fed Chair Jerome Powell said more reductions in borrowing costs now hinge on further progress in lowering stubbornly high inflation. Additionally, the latest Summary of Economic Projections (SEP), or “dot plot”, indicated the US central bank’s intention to reduce the number of interest rate cuts next year from four to just two quarter-percent reductions. The prospects for the Fed’s cautious stance are likely to support the Greenback and act as a headwind for NZD/USD.
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.
