NZD/USD inches higher to near 0.5650 following Caixin Services PMI for China
- NZD/USD rose as Caixin China Services PMI marked the fastest growth in December since May 2024.
- the US Dollar strengthens on the Fed’s hawkish shift regarding its policy outlook.
- Fed officials have indicated a cautious approach to rate cuts planned for 2025.
NZD/USD extends its gains for the second successive day, trading around 0.5630 during the European hours on Monday. The pair appreciates as the New Zealand Dollar (NZD) strengthens following the Caixin Services PMI for China, its key trading partner.
The Caixin China Services Purchasing Managers’ Index (PMI) rose to 52.2 in December 2024, up from 51.5 in November, exceeding market expectations of 51.7. This marks the fastest growth in the services sector since May. However, the Caixin Manufacturing PMI, released on Thursday, unexpectedly fell to 50.5 in December, down from 51.5 in November, missing market forecasts of 51.7.
According to Reuters, the Shanghai Stock Exchange has committed to deepen capital markets opening during a meeting with foreign institutions. China’s economy is underpinned by solid fundamentals and demonstrates resilience amid a complex global environment. The Financial Times reported on Friday that the People's Bank of China (PBoC) anticipates an interest rate cut at an appropriate time this year. Given their close trade relationship, fluctuations in China’s economy often have a notable impact on Australian markets.
The upside potential of the NZD/USD pair may remain limited as the US Dollar could strengthen further, with the hawkish shift by the Federal Reserve (Fed), expecting to pause its easing cycle during the January meeting after three consecutive rate cuts. The Fed’s latest Summary of Economic Projections, including the dot plot, indicates that policymakers anticipate the Federal Funds Rate to reach 3.9% by year-end, suggesting expectations for only two rate cuts in 2025.
Fed officials have also signaled a cautious stance on rate reductions for 2025. On Friday, Richmond Fed President Thomas Barkin emphasized that the policy rate should remain restrictive until there is greater confidence that inflation is on track to return to the 2% target. Similarly, Fed Governor Adriana Kugler highlighted the delicate balancing act facing the US central bank as it aims to slow the pace of monetary easing this year.
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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