NZD/USD gathers strength above 0.5700 as growth concerns weigh on US Dollar
- NZD/USD trades on a positive note near 0.5700 in Friday’s early Asian session.
- Concerns over the US economic slowdown weigh on the US Dollar.
- Deflationary pressures in China and rising bets of further RBNZ rate cuts might cap the downside for the pair.
The NZD/USD pair edges higher to around 0.5700 during the early Asian session on Friday. The growing concerns about US trade policies weigh on the US Dollar (USD) and create a tailwind for the pair. Later on Friday, traders will keep an eye on the preliminary Michigan Consumer Sentiment.
A series of weaker-than-expected US economic data, including the latest Consumer Price Index (CPI) inflation report, raises the fear about the potential impact of intensifying tariff wars on US economic growth. This, in turn, might drag the Greenback lower against the New Zealand Dollar (NZD) in the near term.
Data released by the US Bureau of Labor Statistics on Thursday showed that the US Producer Price Index (PPI) rose 3.2% YoY in February, compared to the rise of 3.7% seen in January. This figure came in softer than the estimation of 3.3%. The core PPI rose 3.4% YoY in February versus 3.8% prior. On a monthly basis, the PPI was unchanged in February, while the core PPI declined by 0.1% during the same reported period.
Nonetheless, the upside for the pair might be capped amid concerns over persistent deflationary pressures in China. China's Consumer Price Index (CPI) in February missed expectations and fell at the sharpest pace in 13 months, while producer price deflation persisted. This report could undermine the China-proxy Kiwi, as China is the largest trading partner of New Zealand.
Additionally, the expectation of further rate cuts from the Reserve Bank of New Zealand could undermine the NZD, though the RBNZ emphasized a more cautious approach to future moves. RBNZ Governor Adrian Orr said the board is forecasting a lower terminal rate than in its November projections and expects two more 25 basis points (bps) rate reductions in April and May, subject to economic conditions evolving as expected.
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.
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