NZD/USD drifts higher above 0.5900 on US-China trade optimism
- NZD/USD edges higher to around 0.5935 in Thursday’s Asian session.
- Trump said there is a chance the US will reach a deal with China.
- Rising RBNZ rate cut bets might cap the pair’s upside.
The NZD/USD pair posts modest gains near 0.5935 during the Asian trading hours on Thursday. The New Zealand Dollar (NZD) strengthens against the Greenback amid hope for a US-China trade deal. Traders await the release of US ISM Manufacturing Purchasing Managers Index (PMI) data, which is due later on Thursday.
US President Donald Trump said early Thursday that there is a “very good probability that the United States will reach a deal with China, but the agreement must align with its conditions. Risk sentiment improves following Trump’s comments, which provides some support to the Kiwi.
However, the implementation of US tariff policy has been erratic, and trade uncertainty is very high. Any signs of renewed escalation between the world’s two largest economies could weigh on the China-proxy NZD, as China is a major trading partner to New Zealand.
China’s official Purchasing Managers' Index (PMI) data on Wednesday failed to boost the NZD. The National Bureau of Statistics revealed that the country’s Manufacturing PMI contracted to 49 in April versus 50.5 prior and 49.9 expected. The Non-Manufacturing PMI declined to 50.4 in April from 50.8 in March, weaker than the 50.7 expected.
Meanwhile, the rising bets of further rate cuts from the Reserve Bank of New Zealand (RBNZ) might contribute to the Kiwi’s downside. The markets fully expect the RBNZ to cut its 3.5% OCR by 25 basis points (bps) in May, with a further reduction to 2.75% by year-end.
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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