NZD/USD attracts some sellers to near 0.5805 as China’s deflationary pressure persists
- NZD/USD extends the decline to around 0.5805 in Monday's early European session, down 0.47% on the day.
- Trump's tariff threats and Chinese deflationary pressure exert some selling pressure on the China-proxy Kiwi.
- The US CPI inflation data will take center stage on Wednesday.
The NZD/USD pair faces some selling pressure to around 0.5805 during the early European session on Monday. The renewed US Dollar (USD) demand and discouraging Chinese consumer inflation undermine the pair. The US November Consumer Price Index (CPI) report will be the highlight on Wednesday.
China's CPI inflation hit a five-month low in November, indicating that Beijing's recent measures to boost weakening economic demand are having little impact, weighing on the China-proxy New Zealand Dollar (NZD) as China is a major trading partner to New Zealand.
Additionally, the potential fresh tariffs from US President-elect Donald Trump might create a headwind for NZD/USD. On Monday, Fitch Ratings lowered its economic projections for China for 2025 to 4.3% from 4.5%, citing risks of even higher US tariffs on Chinese goods.
On the USD’s front, Federal Reserve (Fed) officials appeared on track to lower its interest rates in the December meeting after data showed the US labor market remained solid but continued to cool in November. According to the CME Group's FedWatch Tool, markets currently see an 85.1% possibility of a 25 basis points (bps) rate cut this month.
With a quarter-point rate cut by the US central bank next week a near certainty as per market pricing, analysts believe the Greenback might face some profit-taking after its long run-up in the four weeks since Donald Trump won the US Presidential election. This, in turn, might cap the downside for the NZD/USD pair.
However, traders will focus on the US inflation report on Wednesday for fresh impetus. "The inflation read may determine if we will have a hawkish cut from U.S. policymakers next week, which could still see the U.S. dollar stronger if the Fed were to set the stage for a pause in the rate-cutting process into early 2025," said IG market strategist Yeap Jun Rong.
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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