NZD/USD weakens below 0.5650 as traders await clarity on Trump tariffs on China
- NZD/USD softens to around 0.5630 in Friday’s early Asian session.
- Trump said China is going to end up paying a tariff as well, weighing on the China-proxy NZD.
- Discouraging New Zealand’s economic outlook and RBNZ dovish bets could undermine the Kiwi.
The NZD/USD pair edges lower to near 0.5630 during the early Asian session on Friday, pressured by threats of tariffs from US President Donald Trump against China. Investors await more clarity from Trump’s tariff policies. Also, the US Personal Consumption Expenditures (PCE), Personal Income/Spending, and the Chicago Purchasing Managers' Index (PMI) will be in focus, which is due later on Friday.
Late Thursday, Trump emphasized his plans to impose 25% tariffs on Canada and Mexico on February 1 but has not set a firm date for China. However, Trump noted that China is going to end up paying a tariff as well, and the administration is in the process of doing a China tariff. The markets might turn cautious later in the day while awaiting more clarity about tariff policies. Any signs of a renewed trade war between the United States and China could weigh on the China-proxy Kiwi, as China is a major trading partner to New Zealand.
The US Federal Reserve (Fed) decided to hold interest rates steady on Wednesday, and Fed Chair Jerome Powell said there would be no rush to cut them again until inflation and job data made it appropriate. Fed officials will keep an eye on Trump's policies on immigration, tariffs, taxes and other areas that could prove disruptive. The hawkish hold from the Fed is likely to lift the US Dollar (USD) and create a headwind for NZD/USD in the near term.
The Reserve Bank of New Zealand (RBNZ) chief economist Paul Conway painted a dim picture of the country's economic outlook, cutting weak productivity, investment and trade. Additionally, the dovish expectation from the RBNZ could contribute to the New Zealand Dollar’s (NZD) downside. "In line with RBNZ guidance, markets continue to imply another 50bps rate cut to 3.75% in February and the policy rate to bottom around 3.00% over the next 12 months. RBNZ/Fed policy trend remains drag for NZD/USD,” noted BBH FX analysts.
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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