NZD/USD softens to near 0.5860 as Trade Deficit widens sharply
- NZD/USD weakens to near 0.5860 in Friday’s early European session, losing 0.42% on the day.
- New Zealand’s Trade Deficit widened sharply in August, weighing on the Kiwi.
- The Fed cut the Federal Funds Rate by a quarter percentage point, bringing it to a range of 4.00% to 4.25%.
The NZD/USD pair extends its downside around 0.5860 during the early European session on Friday. The New Zealand Dollar (NZD) faces some selling pressure near a two-week low following the release of New Zealand’s Trade Balance data for August.
Data released by Statistics New Zealand on Friday showed that New Zealand’s trade balance has significantly deteriorated, with the figure showing a deficit of NZD 1.185 billion, compared to the previous deficit of NZD 716 million. This reading came in worse than the expectation of NZD 746 million and suggested a worsening trade position. The downbeat New Zealand Trade Balance report could undermine the Kiwi against the US Dollar (USD) in the near term.
The US Federal Reserve (Fed) cut its benchmark interest rate by 25 basis points (bps) to a new target range of 4.00%–4.25% at its September meeting on Wednesday, as widely expected. This was the first rate reduction of 2025, prompted by a weakening labor market and despite inflation that remains somewhat elevated.
A Summary of Economic Projections (SEP), or ‘dot plot,’ showed that the median Fed policymakers expect two more rate cuts before the end of 2025 and one more in 2026. Powell further stated that the US central bank did not need to rush easing and emphasized a 'meeting-by-meeting' approach to further cuts. Less dovish than expected remarks from the Fed provide some support to the Greenback and act as a headwind for the pair.
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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