During the Asian session on Wednesday, the NZD/USD currency pair showed signs of decline, trading around 0.5910. This downward movement can be attributed to increased expectations regarding an impending interest rate cut by the Reserve Bank of New Zealand (RBNZ) as well as heightened geopolitical tensions, both of which are exerting pressure on the New Zealand dollar.
Market analysts anticipate that the RBNZ will reduce its Official Cash Rate (OCR) by 50 basis points in the coming week, bringing the new rate down to 4.25%. Predictions indicate that a more substantial cut is more likely than a smaller adjustment, suggesting that the market is positioning itself for these changes. Currently, there is a strong expectation of a 50 basis points reduction, while some investors are contemplating a minimal chance of a larger 75 basis points cut, which adds to the bearish sentiment surrounding the kiwi.
In contrast, the People’s Bank of China (PBOC) has opted to maintain its Loan Prime Rates (LPRs), keeping them at 3.10% for one year and 3.60% for five years. This stability in Chinese interest rates comes amid potential shifts in global economic conditions and trading environment.
On the international front, changing dynamics could influence the strength of the US dollar. Expectations surrounding potential fiscal policies from the new US administration suggest a possibility of rising inflation, which could slow the pace of interest rate adjustments. Consequently, speculation has diminished regarding a 25 basis points rate cut in December, with current odds dropping significantly since the previous month.
Compounding these economic factors, escalating geopolitical risks, particularly related to the ongoing conflict between Russia and Ukraine, have raised safe-haven demand for the US dollar. Tensions have intensified with Ukraine reportedly deploying US-supplied missiles against Russian forces and Russia responding with threats of nuclear escalation, further supporting the greenback against risk-sensitive currencies like the NZD.
