NZD/USD softens below 0.5650 despite China’s fiscal support measures
- NZD/USD drifts lower to 0.5645 in Tuesday’s Asian session.
- The Chinese MoF said it was committed to fostering domestic demand growth.
- The expectation of the Fed rate cut path might underpin the USD.
The NZD/USD pair remains on the defensive around 0.5645 during the Asian trading hours on Tuesday. The announcement of China’s fresh fiscal support measures fails to boost the Kiwi as the markets turn cautious ahead of the holiday-shortened trading week.
China’s Ministry of Finance said on Tuesday that the authorities will step up fiscal spending in 2025 and plan to intensify efforts to mitigate risks in key sectors. Ministry of Finance added that the government is committed to fostering domestic demand growth, and fiscal spending will focus more on people's livelihoods and boost consumption. However, the announcement has little to no impact on the New Zealand Dollar (NZD).
On the other hand, the US Federal Reserve (Fed) cut its federal funds rate by 25 basis points (bps), bringing the rate to a range of 4.25% to 4.50%, down from its previous target range of 4.5% to 4.75%. "Fed officials might prefer to be cautious in light of uncertainty about the new administration's policies, especially possible tariff increases," noted Goldman Sachs economists.
Last month, US President-elect Donald Trump unveiled plans to place a 25% tariff on all imports from Mexico and Canada in January and intends to levy an additional 10% fee on all imports from China. Many economists expect the potential Trump’s tariff policies could fuel inflation and might convince the Fed to slow or pause its rate decisions next year in a wait-and-see approach. This, in turn, might support the Greenback and act as a headwind for NZD/USD.
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.