NZD/USD bounces off one-month low, down a little above mid-0.5700s after Chinese PMI
- NZD/USD touches a one-month low as the global flight to safety boosts the USD.
- Fed rate cut bets might cap the USD and help limit the downside for spot prices.
- The RBNZ’s hawkish stance also warrants some caution for aggressive NZD bears.
The NZD/USD pair rebounds from its lowest level since early December, around the 0.5725-0.5720 region, touched during the Asian session on Monday, and fills the weekly bearish gap opening. Spot prices, however, struggle to capitalize on the move up and currently trade just above mid-0.5700s, down 0.15% for the day.
The US Dollar (USD) prolongs its recent goodish recovery move from a multi-month trough, touched in December, and climbs to a three-week high amid the global flight to safety, bolstered by rising geopolitical tensions. The US Army's Delta Force, an elite special forces unit, attacked Venezuela and captured its President Nicolás Maduro, along with his wife, on Saturday. This comes on top of the protracted Russia-Ukraine war, unrest in Iran, and issues surrounding Gaza, which benefits the safe-haven buck and acts as a headwind for the risk-sensitive Kiwi.
The upside for the USD, however, seems limited in the wake of speculation about more interest rate cuts by the Federal Reserve (Fed) this year. This marks a significant divergence as compared to the Reserve Bank of New Zealand's (RBNZ) hawkish outlook on the future policy path. In fact, RBNZ Governor Ann Breman had said that the policy rate is likely to remain at its current level for an extended period if economic conditions unfold as expected. This, in turn, supports the New Zealand Dollar (NZD) and further limits deeper losses for the NZD/USD pair.
Spot prices, meanwhile, move little after data published by RatingDog showed that China's Services Purchasing Managers' Index (PMI) edged lower to 52.0 in December from 52.1 in the previous month. Moving ahead, traders now look forward to the release of the US ISM Manufacturing PMI for some impetus later during the North American session. Furthermore, this week's important US macro data, scheduled at the start of a new month, including the closely-watched Nonfarm Payrolls (NFP) report, will play a key role in influencing the USD price dynamics. Apart from this, geopolitical developments would drive the NZD/USD pair in the near term.
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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