NZD/USD is just under 0.5740 in European hours on Thursday, a recovery from session losses earlier that drove the pair to as low as 0.5707. The currency pair has recently strengthened considerably. This increase comes on the heels of China’s Vice Premier, Ding Xuexiang, pledging to implement stronger macroeconomic policies this year. This announcement seems to have injected some optimism to investors’ sentiment, playing a big part to NZD/USD rebound.
The RBNZ has a mandate to maintain inflation between 1 and 3% in the medium term. In practice, they aim for a rate around the 2% midpoint. This monetary policy direction weighs heavily on the value of NZD/USD. Investors watch the U.S. central bank’s moves to judge the health of the economy. The pair generally appreciates when investors shift to a risk-on approach. This often occurs during periods of general optimism about wider markets’ longer-term growth prospects.
Macro Factors Influencing NZD/USD
The value of NZD/USD is largely determined by the health of the New Zealand economy and its central bank policies. Releases of macroeconomic data – including gross domestic product (GDP) growth rates, employment figures, and inflation statistics – have a great effect on a currency’s movement. Consequently, strong economic data in general should support the NZD/USD, as it indicates a strong economic backdrop.
Moreover, given our views on the key drivers of the Chinese economy, we expect the NZD/USD to outperform. China is New Zealand’s largest trading partner, and any positive developments in China’s economic policies or growth prospects tend to have favorable effects on the New Zealand dollar. Vice Premier Ding Xuexiang’s recent policy pronouncements would have naturally provided a supportive backdrop for NZD/USD.
Dairy prices have a substantial impact on the NZD/USD exchange rate. This reflects the fact that the dairy industry is New Zealand’s export engine room. The movement is due to global dairy prices moving up and down, changing the dynamic in the currency pair. These shifts drive New Zealand’s economic and trade position, and the outlook.
Market Dynamics and Investor Sentiment
The NZD/USD is one of the most actively traded currency pairs among investors. Its movement is a very direct function of the overall market and general investor sentiment. The value of the currency pair tends to weaken during times of high-market volatility or financial distress as investors flock to safer assets. On the flip side, when investors feel like the risks of the market are lower and are more bullish on growth prospects, NZD/USD strengthens.
The differential in interest rates between New Zealand and the United States is hugely important in dictating the direction of NZD/USD. Because of this, interest rate expectations determined by the RBNZ vs the US Federal Reserve greatly influence currency movements. If New Zealand’s interest rates are perceived to be attractive relative to US rates, it can lead to increased demand for the New Zealand dollar.
Investor sentiment responds sharply to macroeconomic policy statements from the big players, China among them. This is particularly the case for New Zealand given their deep trade relationship. China’s leadership has recently sent strong signals about new policies to support growth which have fueled bullishness in the markets. This is reflected in the more positive sentiment represented by the stronger NZD/USD.
Outlook for NZD/USD
Like NZD/USD at current levels around 0.5740, its longer-term direction will be driven by the fortunes of a few key factors. As a double bonus, any further positive turns in China’s economic policy would provide another leg to investor confidence and add additional support under the New Zealand dollar. Any hints of weakness in macroeconomic data would likely prompt a sharp depreciation in USD/JPY.
Therefore, the RBNZ’s ongoing fight to keep inflation in its 1%-3% target band will be front and center for investors. Getting inflation consistently and decisively stable will almost certainly help keep confidence in the New Zealand economy high and underpin NZD/USD.
One thing market participants will be looking out for are changes in global dairy prices. In addition, they will monitor the impact of these changes on New Zealand’s trade balance. Any unexpected or large changes in dairy prices are likely to lead to some movement in the currency pair in the same direction.