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27 Dec 2024
NZD/USD remains on the defensive near 0.5600 in thin year-end trading
- NZD/USD trades in negative territory near 0.5615 in Friday’s early European session.
- The fall in China's industrial profits exerts some selling pressure on the China-proxy Kiwi.
- The potential Trump’s tariff policies might trigger inflation and convince the Fed to slow its easing cycle, supporting the USD.
The NZD/USD pair extends its downside to around 0.5615 during the early Asian session on Friday. The New Zealand Dollar (NZD) weakens amid concerns about weak consumer demand and a prolonged downturn in the property market in China. The markets are likely to trade in a quiet session ahead of the New Year holiday.
Data released on Friday revealed that China’s industrial profits extended declines to a fourth straight month, falling 7.3% in November from a year earlier. Persistently weak Chinese domestic demand could undermine the China-proxy Kiwi, as China is the largest trading partner of New Zealand.
Furthermore, the speculation about a potential 10% tariff on Chinese goods from Donald Trump’s administration contributes to the NZD’s downside. Many analysts expect that 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 lift the Greenback and create a headwind for NZD/USD.
The markets anticipate the Reserve Bank of New Zealand (RBNZ) to deliver further interest rate cuts to stimulate growth after the country sank into recession in the third quarter (Q3). Markets have priced in nearly a 70% chance of a 50 basis points (bps) cut in February, and rates were seen declining to 3.0% by the end of 2025.
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.