NZD/USD softens to near 0.5600 amid China deflation pressure
- NZD/USD weakens to near 0.5600 in Friday’s early Asian session.
- The Fed plans to slow the pace of interest rate cuts this year, lifting the USD.
- Deflation risk in China weighs on the Kiwi.
The NZD/USD pair remains weak to around 0.5600 during the early Asian session on Friday. The firmer Greenback and deflation concerns in China weigh on the New Zealand Dollar (NZD). The US December employment data will be the highlights later on Friday, including Nonfarm Payrolls (NFP), Unemployment Rate and Average Hourly Earnings.
The US Federal Reserve (Fed) officials adopted a cautious stance this year due to inflation risks and uncertainty under the incoming Trump administration, which supports the US Dollar (USD). Several Fed policymakers suggested that the US central bank will move more slowly on rate cuts this year, after cutting at each of its last three meetings in 2024.
The US Bureau of Labor Statistics (BLS) will publish the employment report for December later in the day. Economists expect 160,000 new jobs for December, while the unemployment rate is expected to remain at 4.2% during the same report period. The Average Hourly Earnings are projected to rise by 0.3% MoM in December. Any signs of a strong labor market, steady job growth, and rising incomes could boost the USD and act as a headwind for NZD/USD.
Deflationary pressures in China came despite months of effort by policymakers to stimulate demand. The country’s Consumer Price Index (CPI) increased 0.1% YoY in December, while the Producer Price Index (PPI) declined 2.3% YoY during the same period, sliding for the 27th straight month. This, in turn, exerts some selling pressure on the Kiwi, as China is a major trading partner to New Zealand.
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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