New Zealand Dollar Falters

Domestically, the NZ budget failed to inspire. Image © Adobe Images

The New Zealand Dollar is under pressure as global equity markets buckle under the weight of rising U.S. bond yields, confirming this currency remains highly sensitive to the global backdrop.

The Pound to New Zealand Dollar exchange rate has risen back above 2.08 and continues to consolidate the previous week's advance as investor sentiment falters.

For now, the NZ Dollar's setback looks to be just that: a setback within a broader multi-week rally. Nevertheless, we are wary of the current deterioration in sentiment morphing into something more serious.

"The decline in U.S. stocks reflects a series of concerns among investors, including rising Treasury bond yields, uncertainty about interest rate cuts, and an uncertain economic outlook. These factors have created a risk-averse environment in the market, leading to a massive sell-off of stocks," says Antonio Ernesto Di Giacomo, Market Analyst at xs.com.

The Pound to New Zealand Dollar exchange rate is up on the day at 2.0807 but had earlier touched the 100-day moving average resistance line at 2.0830. A break above here would signal a growing deterioration in the NZ Dollar outlook. The New Zealand Dollar-U.S. Dollar pair has retreated to 0.6110, having been as high as 0.6170 earlier in the week.

"The catalyst for this move appears to be the bond market as the 10-year U.S. Treasury yield is hovering above 4.6% for the first time since early May," says Achilleas Georgolopoulos, Investment Analyst at XM.

"This yield move was triggered by a series of weak bond auctions, but the main reason appears to be the Fed’s inability and unwillingness to turn dovish at this current juncture, as made evident by the recent Fedspeak," he adds.

Rising U.S. bond yields push up the cost of finance not just in the U.S. but more broadly, constraining the growth outlook and causing a rerating in stock valuations. It also dampens demand for currencies that tend to do better when the global economy is expanding, such as the NZ Dollar.

Domestically, the New Zealand budget failed to inspire, as it reflected the realities of a deteriorating domestic economic backdrop.

"The numbers are softer across the board. Treasury expect lower growth, weaker productivity, and more debt. Economic growth starts to lift, off a lower base, into 2025, but hardly shoot the lights out beyond," says Mary Jo Vergara, Senior Economist at Kiwibank.

The RBNZ remains in inflation-fighting mode, which is having the desired effect of dampening economic activity and restraining the hands of the government that won't want to boost inflation with any major giveaways.

Yet, a vigilant RBNZ that cuts interest rates after most of its central bank peers would be supportive of the NZD and will provide some downside protection for the currency in the event of further deteriorations in global sentiment.