NZD/USD seems vulnerable around mid-0.5600s amid US-China trade tensions
- NZD/USD attracts some sellers for the third straight day amid US-China trade war concerns.
- China’s inflation figures released over the weekend fail to provide any respite to the Kiwi.
- The divergent Fed-RBNZ expectations support prospects for a further depreciating move.
The NZD/USD pair drops to a four-day low during the Asian session on Monday, though it rebounds a few pips in the last hour and currently trades around mid-0.5600s. Spot prices, however, keep the red for the third straight day and remain vulnerable to sliding further amid worries about US-China trade tensions.
In fact, the additional US levy on China went into effect last week, while China's retaliatory tariffs on some US exports kicked off this Monday. Adding to this, US President Donald Trump said on Sunday that he will announce additional 25% tariffs on all steel and aluminum imports into the US, and will also announce reciprocal duties over what he sees as unfair trading practices. This raises the risk of a further escalation of trade war between the world's two largest economies and weighs on investors' sentiment, underpinning the safe-haven US Dollar (USD) and denting demand for the perceived riskier Kiwi.
Meanwhile, the latest development fuels worries that Trump's protectionist policies would put upward pressure on inflation in the US. This comes on top of the upbeat US monthly employment details released on Friday and could limit the scope for the Federal Reserve (Fed) to ease policy further. In fact, traders are now pricing in the possibility of just a 36 basis point rate cut by the Fed this year. This, to a larger extent, overshadows data showing that consumer inflation in China grew 0.7% month-on-month in January – its fastest rise in eleven months – compared to a flat reading in the previous month.
However, factory-gate prices continued their downward trajectory, highlighting persistent deflationary pressures in the industrial sector. This, along with the increasing likelihood that the Reserve Bank of New Zealand (RBNZ) will deliver a third consecutive supersized rate cut later this month, suggests that the path of least resistance or the NZD/USD pair remains to the downside. Hence, any attempted recovery could be seen as a selling opportunity and run the risk of fizzling out quickly. The focus now shifts to Fed Chair Jerome Powell's semi-annual congressional testimony on Tuesday and Wednesday.
New Zealand Dollar FAQs
The New Zealand Dollar (NZD), also known as the Kiwi, is a well-known traded currency among investors. Its value is broadly determined by the health of the New Zealand economy and the country’s central bank policy. Still, there are some unique particularities that also can make NZD move. The performance of the Chinese economy tends to move the Kiwi because China is New Zealand’s biggest trading partner. Bad news for the Chinese economy likely means less New Zealand exports to the country, hitting the economy and thus its currency. Another factor moving NZD is dairy prices as the dairy industry is New Zealand’s main export. High dairy prices boost export income, contributing positively to the economy and thus to the NZD.
The Reserve Bank of New Zealand (RBNZ) aims to achieve and maintain an inflation rate between 1% and 3% over the medium term, with a focus to keep it near the 2% mid-point. To this end, the bank sets an appropriate level of interest rates. When inflation is too high, the RBNZ will increase interest rates to cool the economy, but the move will also make bond yields higher, increasing investors’ appeal to invest in the country and thus boosting NZD. On the contrary, lower interest rates tend to weaken NZD. The so-called rate differential, or how rates in New Zealand are or are expected to be compared to the ones set by the US Federal Reserve, can also play a key role in moving the NZD/USD pair.
Macroeconomic data releases in New Zealand are key to assess the state of the economy and can impact the New Zealand Dollar’s (NZD) valuation. A strong economy, based on high economic growth, low unemployment and high confidence is good for NZD. High economic growth attracts foreign investment and may encourage the Reserve Bank of New Zealand to increase interest rates, if this economic strength comes together with elevated inflation. Conversely, if economic data is weak, NZD is likely to depreciate.
The New Zealand Dollar (NZD) tends to strengthen during risk-on periods, or when investors perceive that broader market risks are low and are optimistic about growth. This tends to lead to a more favorable outlook for commodities and so-called ‘commodity currencies’ such as the Kiwi. Conversely, NZD tends to weaken at times of market turbulence or economic uncertainty as investors tend to sell higher-risk assets and flee to the more-stable safe havens.
US-China Trade War FAQs
Generally speaking, a trade war is an economic conflict between two or more countries due to extreme protectionism on one end. It implies the creation of trade barriers, such as tariffs, which result in counter-barriers, escalating import costs, and hence the cost of living.
An economic conflict between the United States (US) and China began early in 2018, when President Donald Trump set trade barriers on China, claiming unfair commercial practices and intellectual property theft from the Asian giant. China took retaliatory action, imposing tariffs on multiple US goods, such as automobiles and soybeans. Tensions escalated until the two countries signed the US-China Phase One trade deal in January 2020. The agreement required structural reforms and other changes to China’s economic and trade regime and pretended to restore stability and trust between the two nations. However, the Coronavirus pandemic took the focus out of the conflict. Yet, it is worth mentioning that President Joe Biden, who took office after Trump, kept tariffs in place and even added some additional levies.
The return of Donald Trump to the White House as the 47th US President has sparked a fresh wave of tensions between the two countries. During the 2024 election campaign, Trump pledged to impose 60% tariffs on China once he returned to office, which he did on January 20, 2025. With Trump back, the US-China trade war is meant to resume where it was left, with tit-for-tat policies affecting the global economic landscape amid disruptions in global supply chains, resulting in a reduction in spending, particularly investment, and directly feeding into the Consumer Price Index inflation.
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