Kiwi Holds Above 0.5750 as Fed Cut Expectations Recede

Key Moments

NZD/USD Holds Gains Despite Strong US Data

The NZD/USD pair is seeing buying interest around 0.5755 in early European trade on Friday. The pair is recovering off recent lows, although the scope for additional near-term gains may be restrained after robust US economic data reduced expectations for imminent interest rate cuts by the Federal Reserve.

US Labor Data Backs the Dollar

Fresh US labor market figures released on Thursday pointed to ongoing resilience. Initial claims for unemployment benefits fell by 9,000 to a seasonally adjusted 198,000 for the week ended January 10. That reading was below the market forecast of 215,000 and came in under the prior week’s level of 207,000, which was revised from 208,000.

The stronger-than-anticipated Jobless Claims report has underpinned the US Dollar, reinforcing the view that the Fed is likely to keep interest rates steady over the coming months. In response, analysts at Morgan Stanley shifted their anticipated timing of Fed rate cuts to June and September, from earlier expectations of January and April.

Fed Independence Concerns Temper USD Support

While firm US data is lending support to the Greenback, political uncertainty around the Federal Reserve is acting as a counterweight. Questions over the central bank’s independence could limit further US Dollar strength and provide some support to NZD/USD.

US President Donald Trump said on Wednesday that he has no current plans to dismiss Fed Chair Jerome Powell despite the Justice Department’s criminal investigation into Powell, while adding that it was “too early” to determine his ultimate decision.

RBNZ Signals Pause but Keeps Options Open

On the New Zealand side, policy signals from the Reserve Bank of New Zealand are also shaping the outlook for the Kiwi. The RBNZ indicated that the current easing phase may be drawing to a close, with projections suggesting the Official Cash Rate could remain unchanged through 2026.

At the same time, RBNZ Governor Christian Hawkesby emphasized that the central bank maintains “full optionality” and retains the ability to ease policy further if domestic economic conditions deteriorate.

New Zealand Dollar: Key Drivers and Policy Links

Fundamental Drivers of the NZD

The New Zealand Dollar (NZD), often referred to as the Kiwi, is widely traded in global markets. Its valuation is primarily tied to New Zealand’s economic performance and monetary policy. However, several specific factors can have a notable impact on its movement.

The trajectory of the Chinese economy is particularly important, as China is New Zealand’s largest trading partner. Negative developments for China’s economy can signal weaker demand for New Zealand exports, undermining growth and pressuring the NZD. Dairy prices are another critical driver, given that dairy products represent New Zealand’s main export. Elevated dairy prices tend to boost export revenues, support the domestic economy, and, in turn, favor the New Zealand Dollar.

RBNZ Policy and the Kiwi

The Reserve Bank of New Zealand targets inflation of 1% to 3% over the medium term, with a preference to keep it close to 2%. To achieve this, the RBNZ sets interest rates at levels it deems appropriate.

When inflation runs too high, the RBNZ raises interest rates to cool the economy. Such increases typically lift bond yields and can enhance the attractiveness of New Zealand assets, supporting the NZD. Conversely, when the central bank lowers rates, the currency generally faces downside pressure. The interest rate differential between New Zealand and the United States – or expectations of how that spread will evolve – is a key factor in the behavior of the NZD/USD pair.

Impact of Economic Data on NZD

Macroeconomic releases from New Zealand are central to assessing the health of the economy and can significantly affect the NZD’s value. Strong indicators, such as robust growth, low unemployment, and firm confidence, are typically positive for the currency. Such strength can attract foreign capital and may prompt the RBNZ to consider higher interest rates if it coincides with elevated inflation.

In contrast, weak economic data tends to weigh on the New Zealand Dollar, reflecting concerns over growth prospects and potentially looser monetary policy.

Risk Sentiment and the New Zealand Dollar

Broader market risk appetite is another important influence on the NZD. The currency tends to benefit during risk-on phases, when investors view global risks as contained and are optimistic about growth. These conditions are often supportive for commodities and so-called commodity currencies, including the Kiwi.

In periods of market stress or heightened uncertainty, investors typically reduce exposure to higher-risk assets and seek refuge in perceived safe havens. During such episodes, the NZD often comes under pressure as part of this broader shift in positioning.