New Zealand Dollar a Big Winner of Fed Rate Cut Hopes

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The New Zealand Dollar is the day's G10 winner courtesy of a boost to expectations that the Federal Reserve will cut interest rates in June.

Hopes for such a move rose following news that the largest sector of the U.S. economy cooled in March.

"Softer than expected U.S. ISM services data is weighing on the USD, to the benefit of the Kiwi," says David Croy, a foreign exchange strategist at ANZ Bank.

The ISM services PMI read at 51.4% in March, notably lower than the 52.6% printed in February and below expectations for an increase to 52.7%. The Services Paid component of the survey - which provides a decent indicator of inflationary pressures in the sector - fell from 58.6% to 53.4%, a four-year low.

Following the data, Fed chair Jerome Powell said in an address that the Fed remained data-dependent but that the latest inflation figures should not stop the Fed from cutting interest rates.

"The USD fall overnight, in response to softer data and Fed comments, supports NZD/USD near term," says Richard Franulovich, Head of FX Strategy at Westpac.

Markets have been steadily lowering expectations for the quantum of rate cuts to come from the Fed in 2024 amidst surprisingly strong U.S. data, meaning the surprisingly soft ISM services print came as a surprise that unwound some of the recent moves.

In response, commodity prices have risen, stock markets are supported and global bond yields have eased.

The improved investor sentiment results in a supportive backdrop for the 'high beta' New Zealand Dollar, which is the day's top-performing G10 currency.

The Pound to New Zealand Dollar exchange rate is 0.40% lower on the day at 2.0970, the Euro to New Zealand Dollar is 0.30% lower at 1.7985. The New Zealand Dollar is half a per cent higher against the U.S. Dollar at 0.6037.

"USD price action continues to overshadow local considerations both here and in other FX markets as volatility intensifies, as can be seen by large moves in the Kiwi (this time higher)," says Croy.

Croy reminds us that the week's most important U.S. data release still lies ahead in the form of Friday's U.S. jobs report.

"With U.S. March non-farm payrolls data due... more volatility is on the cards," says Croy.