NZD/USD strengthens above 0.5750, bullish US Dollar might cap its downside
- NZD/USD edges higher to around 0.5770 in Friday’s early Asian session.
- US PPI increased by the most in five months in November, hotter than expected.
- Trump tariff threats could undermine the China-proxy Kiwi.
The NZD/USD pair gains ground to near 0.5770 during the early Asian session on Friday. The Greenback strengthens due to the hotter-than-expected US Producer Price Index (PPI) report. The US Federal Reserve (Fed) interest rate decision will take center stage next week.
Data released by Business NZ revealed that New Zealand’s Performance of Manufacturing Index (PMI) eased to 45.5 in November from 45.8 in the previous reading. The reading indicated that Manufacturing sector is still under significant pressure.
Furthermore, the tariff threats from Trump’s administration have boosted the US Dollar (USD) across the board and created a headwind for the pair. Speculations about a potential 10% tariff on Chinese goods might drag the China-proxy New Zealand Dollar (NZD) lower as China has been the largest trading partner of New Zealand.
On the USD’s front, financial markets have almost fully priced in a 25 basis points (bps) rate cut at the Fed's December 17-18 policy meeting, according to CME Group's FedWatch Tool. The US PPI for final demand jumped 0.4% MoM in November, the largest gain since June, after an upwardly revised 0.3% increase in October, the Labor Department's Bureau of Labor Statistics reported Thursday. This reading was better than the 0.2% expected.
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.