On Thursday, the New Zealand Dollar (NZD) against the US Dollar (USD) showcased an uptick for the second consecutive day. The pair capitalises on the prevailing global financial dynamics by trading near 0.6150 in the early hours of the European session. This movement comes when the currency market is highly responsive to central bank policies and economic indicators from major economies.
During his testimony before the House Financial Services Committee, Federal Reserve Chair Jerome Powell discussed the possibility of rate cuts in 2024. However, he underscored a cautious approach, emphasising that cuts would only be considered once there’s greater assurance that inflation is moving back towards the Fed’s 2% target. This stance injects uncertainty into the market, influencing domestic and global currency movements.
Amid Powell’s testimony, the US Dollar Index (DXY) declined for the fifth successive session, falling to near 103.23. Concurrently, Treasury yields mirrored this sentiment, with the 2-year at 4.56% and the 10-year at 4.11%. These movements reflect the market’s anticipation of the Fed’s future monetary policy direction, affecting currency pairs like the NZD/USD.
The CME FedWatch Tool, signalling market predictions for Federal Reserve moves, shows varying rate cut chances across diverse months. With a 5.0% chance in March, 19.3% in May, and a significant jump to 55.8% in June, the tool provides a glimpse into the investors’ sentiment regarding the pace of monetary easing.
The Chinese economy’s robust performance, particularly its impressive trade balance of $125.16 billion in February, beating the $103.7 billion forecast, positively impacts the NZD/USD rate. A year-on-year increase in imports by 3.5% and exports by 7.1% underscores China’s economic resilience, fostering a favourable outlook for the NZD due to close trade ties between New Zealand and China.
The Reserve Bank of New Zealand, led by Chief Economist Paul Conway and Governor Adrian Orr, takes a cautious stance. While acknowledging the potential for interest rate cuts if the US Fed eases monetary policy, the RBNZ aims to begin policy normalisation in 2025, citing persistent inflationary pressures. This prudent approach reflects the bank’s commitment to long-term economic stability while navigating immediate global financial challenges.
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