NZD/USD depreciates to near 0.5650 ahead of Fed policy decision
- NZD/USD loses ground amid risk aversion ahead of Fed interest rate decision on Wednesday.
- Traders expect the Fed to maintain its policy rate within the target range of 4.25%-4.50%.
- The RBNZ is widely expected to deliver another bumper 50 bps rate cut in February.
NZD/USD continues to lose ground for the third consecutive day, trading around 0.5660 during the European hours on Wednesday. The pair faces challenges amid risk-off sentiment ahead of the Federal Reserve’s (Fed) interest rate decision scheduled later in the North American session.
The US Dollar Index (DXY), which measures the US Dollar’s (USD) value against six major currencies, remains steady around 108.00 at the time of writing. The US Dollar receives support from the Federal Reserve’s (Fed) cautious stance regarding its policy outlook.
According to the CME FedWatch tool, market expectations indicate nearly 100% certainty that the Fed will maintain its policy rate within the target range of 4.25%-4.50%. However, traders will be closely monitoring Fed Chair Jerome Powell’s press conference for any hints regarding the future direction of monetary policy.
Additionally, the Greenback gained ground following tariff threats made by US President Donald Trump. Trump announced plans on Monday evening to impose tariffs on imports of computer chips, pharmaceuticals, steel, aluminum, and copper. The goal is to shift production to the United States (US) and bolster domestic manufacturing.
The New Zealand Dollar struggles due to dovish expectations surrounding the Reserve Bank of New Zealand’s (RBNZ) policy stance. Swaps markets are now pricing in nearly a 90% chance of another 50 bps reduction on February 19, adding to the two cuts already delivered earlier in the cycle. The central bank is expected to deliver a total of 100 bps of rate cuts for the remainder of 2025.
RBNZ Chief Economist Conway stated on Wednesday that the Official Cash Rate (OCR) is expected to move toward the neutral interest rate in the absence of future shocks. The long-term nominal neutral interest rate is currently estimated to be between 2.5% and 3.5%. The Monetary Policy Committee remains confident that persistent domestic inflationary pressures will subside. A decline in domestic pricing intentions and inflation expectations is expected to pave the way for further easing of the OCR, as indicated in November.
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.