The New Zealand Dollar (NZD) is encountering headwinds as dovish sentiments about the Reserve Bank of New Zealand’s (RBNZ) policy direction weigh on its performance. In September, New Zealand’s Trade Balance recorded a deficit of $2.1 billion, slightly improved from the previous month’s deficit of $2.3 billion. Meanwhile, the US Dollar is experiencing upward momentum, driven by heightened risk aversion amid rising concerns regarding a possible resurgence of inflation in the United States.
In the Asian session on Tuesday, NZD/USD managed to recover some ground, hovering around 0.6040. Still, the outlook for the New Zealand Dollar remains precarious as indications emerge for potential rate cuts by the RBNZ in November, due to a combination of easing inflationary pressures and sluggish economic growth. Notably, New Zealand’s exports rose by $246 million, or 5.2%, reaching a total of $5.0 billion, while imports fell by $67 million, or 0.9%, totaling $7.1 billion.
Support for the NZD may arise from recent developments in China, New Zealand’s largest trading partner. The Chinese government lowered its 1-year and 5-year Loan Prime Rates, which could foster domestic economic growth and enhance demand for New Zealand’s exports.
In contrast, the US Dollar has found backing from a notable increase in US Treasury yields, which surpassed 2% on Monday. Currently, the yields on the 2-year and 10-year U.S. Treasury bonds are at 4.02% and 4.18%, respectively. This uptick is attributed to indicators of economic strength and rising fears of inflation, which bolster expectations for a tighter monetary stance from the Federal Reserve.
Recent economic indicators have reduced speculation surrounding a substantial interest rate cut by the Federal Reserve in November. Current projections indicate a high probability of a modest 25-basis-point rate cut, while the chances of a more aggressive 50-basis-point reduction remain virtually nonexistent. The Federal Reserve’s focus on the labor market suggests a cautious approach towards monetary easing, favoring gradual adjustments over significant shifts in policy.
