NZD/USD slumps below 0.5950 as New Zealand's economy shrinks more than expected in Q2
- NZD/USD faces some selling pressure to around 0.5935 in Thursday’s early Asian session.
- New Zealand's economy contracted 0.9% QoQ in Q2, weaker than expected.
- Fed projected two more cuts before the end of the year.
The NZD/USD pair falls to near 0.5935 during the early Asian session on Thursday. The weaker-than-expected New Zealand Gross Domestic Product (GDP) exerts some selling pressure on the Kiwi against the US Dollar (USD). The US weekly Initial Jobless Claims will be in the spotlight later on Thursday, along with the Philly Fed Manufacturing Index and the CB Leading Index.
Data released by Statistics New Zealand on Thursday showed that the country’s GDP declined by 0.9% QoQ in the second quarter (Q2), compared with a 0.9% expansion (revised from 0.8%) in Q1. This figure came in below the market consensus of -0.3%. On an annual basis, the New Zealand economy contracted by 0.6% in Q2, compared with a fall of 0.6% (revised from -0.7%) in Q1, while missing the estimation of 0%.
The downbeat New Zealand GDP report could reinforce the Reserve Bank of New Zealand’s (RBNZ) stance that it needs to cut the cash rate by 25 basis points (bps) twice more this year. This, in turn, could create a headwind for the pair.
On the USD’s front, the US Federal Reserve (Fed) lowered its benchmark interest rate by a quarter percentage point and penciled in two more reductions this year. The reduction was widely expected, though US President Donald Trump called for a "bigger" cut to benchmark interest rates. Fed Chair Jerome Powell pointed to growing signs of weakness in the labor market to explain why officials decided it was time to cut rates after holding them steady since December amid concerns over tariff-driven inflation.
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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