The NZD/USD pair is expected to hover in a tight range at the start of a new week and extend its recent strong gains to its highest level in almost a month, which it touched on Friday. Spot prices hold below the mid-0.5700s and react little to disappointing Chinese data.
In fact, China’s manufacturing Purchasing Managers’ Index (PMI) unexpectedly returned to contraction, falling to 49.9 in November from 50.6 in October. This comes on top of official purchasing managers’ indexes released over the weekend, which showed that business activity in China’s manufacturing sector contracted for the eighth month, while a measure of the services sector contracted for the first time in nearly three years and fell to its lowest level since December 2022.
However, the immediate market reaction turned out to be weak amid easing trade tensions and recent government measures announced to boost consumption in the world’s second-largest economy. This, combined with the Reserve Bank of New Zealand’s (RBNZ) hawkish outlook on the future policy path, continues to act as a tailwind for the New Zealand Dollar (NZD). Apart from this, the prevailing USD selling bias is providing some support to the NZD/USD pair.
The Reserve Bank of New Zealand cut interest rates by a full 25 basis points last week and signaled the end of its easing cycle. In contrast, traders now expect a greater than 85% probability that the US Federal Reserve will cut borrowing costs again this month. This, combined with the underlying bullish tone, contributes to the relatively weak performance of the US dollar as a safe haven against the riskier New Zealand dollar and supports the case for further upside for NZD/USD.
Frequently asked questions about the New Zealand dollar
The New Zealand Dollar (NZD), also known as the Kiwi, is a popular currency among investors. Its value is widely determined by the health of the New Zealand economy and the policy of the country’s central bank. However, there are some unique characteristics that could make the New Zealand dollar move as well. The performance of the Chinese economy tends to move the New Zealand dollar because China is New Zealand’s largest trading partner. Bad news for the Chinese economy will likely mean New Zealand’s exports to the country will decline, affecting the economy and therefore its currency. Another factor that affects the New Zealand dollar is dairy prices as the dairy industry is New Zealand’s main export. Higher dairy prices boost export income, which contributes positively to the economy and therefore the New Zealand dollar.
The Reserve Bank of New Zealand (RBNZ) aims to achieve and maintain inflation between 1% and 3% over the medium term, with a focus on keeping it near the 2% midpoint. To this end, the Bank sets an appropriate level of interest rates. When inflation is very high, the Reserve Bank of New Zealand will increase interest rates to cool the economy, but this move will also cause bond yields to rise, making it more attractive for investors to invest in the country and thus strengthening the New Zealand dollar. Conversely, low interest rates tend to weaken the New Zealand dollar. The so-called spread, or how New Zealand’s interest rates compare or are expected to compare to those set by the US Federal Reserve, can also play a major role in moving the NZD/USD pair.
New Zealand’s macroeconomic data releases are key to assessing the state of the economy and can influence the valuation of the New Zealand Dollar (NZD). A strong economy, based on high economic growth, low unemployment, and high confidence, is good for the New Zealand dollar. High economic growth attracts foreign investment and may encourage the Reserve Bank of New Zealand to increase interest rates, if this economic strength is accompanied by higher inflation. Conversely, if economic data is weak, the value of the New Zealand dollar is likely to decline.
The New Zealand Dollar (NZD) tends to strengthen during periods of risk, or when investors view broader market risk as low and are optimistic about growth. This tends to lead to a more positive outlook for commodities and so-called “commodity currencies” such as the New Zealand. Conversely, the New Zealand dollar tends to weaken in times of market turmoil or economic uncertainty as investors tend to sell riskier assets and flee to more stable safe havens.
