NZD/USD loses ground below 0.5900 on renewed US Dollar demand
- NZD/USD softens to around 0.5870 in Friday’s Asian session.
- China’s CPI dropped 0.4% YoY in August as factory deflation deepened.
- Markets expect the Fed to start rate cuts at its September meeting next week.
The NZD/USD pair loses ground to near 0.5870 during the Asian trading hours on Friday. The pair edges lower on a modest rebound in the US Dollar (USD) and deflationary pressures in China. Traders will keep an eye on the University of Michigan Consumer Sentiment Index data, which will be released later on Friday.
China’s Consumer Price Index (CPI) slipped back into decline in August, suggesting persistent deflationary pressures. The National Bureau of Statistics of China revealed on Wednesday that the CPI, a key gauge of inflation, fell 0.4% year-on-year last month, worse than market expectations of a 0.2% decline. China faces deflationary pressures as weak domestic demand and industrial oversupply weigh on prices.
It’s worth noting that China’s CPI is often seen as a proxy for Chinese economic health. If the CPI is weak, it signals sluggish demand in the Chinese economy, weighing on the China-proxy Kiwi, as China is a major trading partner of New Zealand.
The US Consumer Price Index (CPI) inflation rose more than expected in August, while the annual increase in inflation was the largest in seven months. However, the figures were not as high as the market expected, supporting the view that the US Federal Reserve (Fed) will resume cutting interest rates next week. The prospect of Fed rate reductions could undermine the Greenback and help limit the pair’s losses in the near term.
"The CPI didn't come in as high as the market expected. Ultimately, the biggest concern ... is that the dovishness that comes with the weak jobs numbers is going to be unwound if CPI accelerates more than expected," said Eugene Epstein, head of trading and structured products, North America, at Moneycorp in New Jersey.
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.