NZD/USD holds on to gains near mid-year 0.6100, remains below two-month high ahead of Fed’s Powell

VaselineAugust 23, 2024

0 3 minutes read

NZD/USD holds on to gains near mid-year 0.6100, remains below two-month high ahead of Fed’s Powell

NZD/USD pulls some buying dips on Friday amid Fed-inspired dovish weakness.
The disappointing release of New Zealand retail sales data is not much of a drag on growth.
Traders are now eagerly awaiting Fed Chairman Powell’s speech before placing new directional bets.

The NZD/USD pair regains some positive traction on Friday, although it lacks a follow-through and remains limited in a three-day old range until the start of the European session. Spot prices are currently trading around the mid-0.6100s, within striking distance of a more than two-month high hit on Wednesday, as traders now look to Federal Reserve (Fed) Chairman Jerome Powell’s speech for fresh impetus.

Powell’s comments will be scrutinized for clues about the US central bank’s policy path and whether a weakening labor market could force the Fed to announce a larger-than-normal 50 basis point rate cut basis (bps) in September. Expectations were fueled by data released on Wednesday that showed US employers added 818,000 fewer jobs than they reported in the year to March. Therefore, the outlook will play a key role in influencing the price dynamics of the US dollar (USD) in the short term and determining the next stage of a directional movement for the NZD/USD pair.

Meanwhile, growing acceptance that the Fed will begin its policy easing cycle next month and borrowing costs by 100 bps by the end of this year are not helping the USD capitalize on its overnight recovery from the YTD low. This helps offset weaker data from New Zealand, showing retail sales fell more than expected by 1.2% QoQ in the second quarter, compared to a 0.5% rise in the previous quarter, and acts as a tailwind for the NZD/USD pair. That said, a combination of factors could limit further gains for the currency pair.

Against the backdrop of China’s economic woes, renewed fears of a potential US recession are tempering investor appetite for riskier assets and could act as a headwind for risk-sensitive Kiwis. This, along with the Reserve Bank of New Zealand’s (RBNZ) surprise rate cut earlier this month and a favorable tilt pointing to more cuts in the coming months, could prevent traders from placing aggressive bullish bets around the NZD pair /USD. However, spot prices remain on track for strong gains for a fourth straight week.

US Dollar FAQ

The US dollar (USD) is the official currency of the United States of America and the “de facto” currency of a significant number of other countries where it is found in circulation alongside local banknotes. It is the world’s most heavily traded currency, accounting for more than 88% of total global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, as of 2022. After World War II world, the USD has taken over from the British pound as the world’s reserve currency. For most of its history, the US dollar was backed by gold, until the Bretton Woods Agreement in 1971, when the gold standard disappeared.

The most important factor influencing the value of the US dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to ensure price stability (inflation control) and to promote full employment. Its main tool for achieving these two objectives is the adjustment of interest rates. When prices rise too fast and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the value of the USD. When inflation falls below 2% or the unemployment rate is too high, the Fed can lower interest rates, which affects interest rates.

In extreme situations, the Federal Reserve can also print more dollars and engage in quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (for fear of default). It is a last resort when simply lowering interest rates is unlikely to achieve the desired result. It was the Fed’s preferred weapon to combat the credit crunch that occurred during the Great Financial Crisis of 2008. This involves the Fed printing more dollars and using them to buy US government bonds, mainly from financial institutions . QE usually leads to a weaker US dollar.

Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal of maturing bonds it holds in new purchases. It is usually positive for the US dollar.

VaselineAugust 23, 2024

0 3 minutes read

US Dollar FAQ

Vaseline

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