New Zealand’s current account deficit needs to narrow further

The New Zealand Dollar (NZD), also known as the Kiwi, is a well-known traded currency among investors. Its value is largely determined by the health of New Zealand’s economy and the policy of the country’s central bank. However, there are some unique features that can make the NZD move as well. The performance of the Chinese economy tends to move Kiwis as China is New Zealand’s largest trading partner. Bad news for the Chinese economy likely means fewer New Zealand exports to the country, hitting the economy and therefore its currency. Another factor that moves the NZD is the price of dairy products, as the dairy industry is New Zealand’s main export. High dairy prices boost export earnings, contributing positively to the economy and therefore the NZD.

The Reserve Bank of New Zealand (RBNZ) aims to achieve and maintain an inflation rate of between 1% and 3% over the medium term, with a focus on keeping it close to the 2% midpoint. For this purpose, the bank sets an appropriate level of interest rates. When inflation is too high, the RBNZ will raise interest rates to cool the economy, but this move will also raise bond yields, increasing the attractiveness of investors to invest in the country and thus boosting the NZD. Conversely, lower interest rates tend to weaken the NZD. The so-called rate differential, or how New Zealand rates are or are expected to be compared to those set by the US Federal Reserve, can also play a key role in moving the NZD/USD pair.

Macroeconomic data released in New Zealand is key to assessing the state of the economy and can impact the valuation of the New Zealand dollar (NZD). A strong economy based on high growth, low unemployment and high confidence is good for the NZD. High economic growth attracts foreign investment and may encourage the Reserve Bank of New Zealand to raise interest rates if this economic strength is coupled with increased inflation. Conversely, if economic data is weak, the NZD is likely to depreciate.

The New Zealand Dollar (NZD) tends to strengthen during periods of risk or when investors perceive broader market risks to be low and are bullish on growth. This tends to lead to a more favorable outlook for commodities and so-called “commodity currencies” such as the kiwi. Conversely, the NZD tends to weaken during periods of market turbulence or economic uncertainty as investors tend to sell riskier assets and flee to more stable havens.