New Zealand Dollar Struggles Below 0.5700 as Oil Prices Weigh on Risk Appetite

• With 0.5700 still capping the range, NZD/USD edges higher on Friday.
• Diverging RBNZ-Fed monetary policy expectations have supported the Kiwi this week.
• A steep reversal in US Treasury yields is countering the support that risk aversion offers the US Dollar.

Oil prices have reached fresh five-month highs, prompting a moderately risk-averse mood on Friday, while the New Zealand Dollar (NZD) edges higher against the US Dollar (USD) within Thursday’s trading range. Around 0.5690, NZD/USD remains just short of the one-month high of 0.5710 reached earlier this week, although its bullish momentum is waning.

Expectations of an interest rate increase at next week’s Reserve Bank of New Zealand (RBNZ) monetary policy meeting have strengthened, helping the Kiwi rank among this week’s best-performing major currencies. A weaker exchange rate and the energy shock have raised the near-term inflation outlook.

On Friday, however, mounting tensions in the Middle East are driving oil prices higher and eroding risk appetite. Brent Crude climbed above $110.00 a barrel to a five-month high, adding to global inflation while leaving crude-importing economies, including New Zealand’s, more exposed. This could present the RBNZ with a serious challenge.

Falling US Treasury yields restrain USD rallies

Despite this week’s risk aversion, the US Dollar has received little meaningful support. With US Treasury yields reversing lower, investors have abandoned hopes of a Federal Reserve (Fed) interest rate rise next week and are reassessing the overall extent of the tightening cycle, keeping the Greenback under pressure.

Increasing doubts over the AI sector’s profitability have drawn investors back to the safety of US Government bonds this week. The resulting sharp fall in long-term US bond yields has reduced pressure on the central bank to raise interest rates.

Later on Friday, preliminary US S&P Global Purchasing Managers' Index (PMI) readings will provide an indication of the strength of business activity. Their effect on the US Dollar is nevertheless likely to be modest, since the figures will not alter the outlook for the Fed’s next monetary policy meeting.