RBNZ hold: New Zealand Dollar gives back Iran-talks gains

0.5600 in sight as NZD/USD erases its entire gain from Dollar weakness.
2.75% rate hold on a 4-3 RBNZ vote leaves NZD/USD lagging the Euro and the Pound.
Third-quarter New Zealand jobs figures are due Tuesday, ahead of the November 7 election.

2.75% remains the Reserve Bank of New Zealand (RBNZ) policy rate. NZD/USD has meanwhile surrendered all the gains driven by a weaker Dollar. US-Iran diplomacy had pushed the Dollar and Crude Oil lower, lifting the pair from a session trough just above 0.5600 to just below 0.5650. It now trades back just above 0.5600, lower than its level at the start of the week.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

A four-to-three vote kept RBNZ rates unchanged on October 28, with Governor Breman backing the hold. Westpac described the decision as a shock to the market. With the next policy decision due on December 9 and the Fed rate at 3.75%-4.00%, the rate differential for NZD/USD remains at least 1.00 percentage point until then.

Despite projecting inflation to rise from 3.7% in September to 4.4% by year-end, the RBNZ opted against a rate increase. The New Zealand Dollar has also weakened against the Australian Dollar as firmer Australian inflation fuels expectations of further Reserve Bank of Australia (RBA) hikes. Against this backdrop, NZD/USD has underperformed the Euro and the Pound versus the Dollar.

5.5% unemployment forecast: key calendar events

At 21:45 GMT on Tuesday, New Zealand releases its third-quarter labour market figures. Forecasts put unemployment at 5.5%, following 5.6%, and employment growth at 0.4%, following 0.5%. These are the principal New Zealand data releases ahead of the RBNZ's December 9 decision. The general election takes place on Saturday, November 7.

A 65K increase is forecast for US October Nonfarm Payrolls (NFP), due Friday at 13:30 GMT, while unemployment is expected to remain at 4.2%. Before that, September job openings are scheduled for Tuesday at 15:00 GMT, with 7.13 million expected against 7.079 million previously. Both releases inform the Fed side of the NZD/USD interest-rate differential.

Half-cent range contains NZD/USD

Since October 29, one day after the RBNZ decision, NZD/USD has traded within a half-cent range. The preceding advance from the October 14 trough just above 0.5550 stalled just below the 50-day Exponential Moving Average (EMA). The 50-day EMA now sits near 0.5700, while the 200-day average is just below 0.5800.

5-minute NZD/USD chart

Daily NZD/USD chart

New Zealand Dollar: common questions

Which forces shape the New Zealand Dollar?

Widely traded by investors, the New Zealand Dollar (NZD) is also known as the Kiwi. New Zealand's economic health and central bank policy are the main determinants of its value, although several country-specific factors also influence the currency. China is New Zealand's largest trading partner, so Chinese economic performance tends to affect the Kiwi. Adverse economic news from China is likely to signal weaker demand for New Zealand exports, weighing on the economy and, in turn, the currency. Dairy prices are another important driver because dairy is New Zealand's main export industry. Higher prices increase export earnings, supporting both the economy and the NZD.

What do RBNZ policy decisions mean for the New Zealand Dollar?

Maintaining inflation within 1% to 3% over the medium term, preferably close to the 2% midpoint, is the Reserve Bank of New Zealand's (RBNZ) objective. It sets interest rates accordingly. If inflation becomes too high, the RBNZ raises rates to slow the economy. Higher rates also lift bond yields, making investment in New Zealand more attractive and supporting the NZD. Rate cuts, by contrast, generally weaken the currency. Another important influence on NZD/USD is the interest-rate differential: the actual or expected gap between New Zealand rates and those set by the US Federal Reserve.

Why do economic releases matter for the New Zealand Dollar?

By revealing the condition of New Zealand's economy, macroeconomic releases can affect the valuation of the New Zealand Dollar (NZD). Robust growth, low unemployment and strong confidence underpin a healthy economy and support the currency. Strong growth draws foreign investment and, when accompanied by elevated inflation, may prompt the Reserve Bank of New Zealand to raise interest rates. Weak data, on the other hand, are likely to push the NZD lower.

How does market risk appetite affect the New Zealand Dollar?

During risk-on trading, the New Zealand Dollar (NZD) generally appreciates as investors judge broader market risks to be low and take an optimistic view of growth. Such conditions tend to improve the outlook for commodities and so-called ‘commodity currencies’, including the Kiwi. Market turmoil or economic uncertainty usually has the opposite effect: investors sell higher-risk assets in favour of more stable safe havens, and the NZD tends to weaken.