NZD/USD softens to near 0.5700 on China's deflationary pressures
- NZD/USD loses ground to near 0.5710 in Monday’s Asian session.
- China's deflationary pressures deepen in February, weighing on the Kiwi.
- Concerns about the US economic outlook after weaker US employment data might cap the pair’s downside.
The NZD/USD pair edges higher to around 0.5715 during the Asian trading hours on Monday. The softer-than-expect Chinese inflation data weighs on the New Zealand Dollar (NZD). The US Consumer Price Index (CPI) inflation data for February will be the highlight on Tuesday.
China's CPI in February missed expectations and fell at the sharpest pace since January 2024. The CPI fell 0.7% in February from a year earlier, reversing January's 0.5% increase, data from the National Bureau of Statistics (NBS) showed on Sunday.
"China's economy still faces deflationary pressure. While sentiment was improved by the developments in the technology space, domestic demand remains weak," said Zhiwei Zhang, president and chief economist at Pinpoint Asset Management. The sluggish household demand and weak consumption have raised concern about the world's second-largest economy, which exerts some selling pressure on the China-proxy Kiwi as China is a major trading partner to New Zealand.
The weaker-than-expected US February Nonfarm Payrolls (NFP) data suggested that the Federal Reserve (Fed) remained on track to cut interest rates multiple times this year. This, in turn, might undermine the Greenback and create a tailwind for NZD/USD. Financial markets expect the central bank to resume rate cuts in June, though much would depend on inflation.
San Francisco Fed President Mary Daly on Friday highlighted the growing uncertainty among businesses but said with the economy and interest rates being in a "good place," the Fed should not make any reactionary moves. Meanwhile, Fed Chairman Jerome Powell said Friday that the US central bank can wait to see how President Donald Trump’s aggressive policy actions play out before it moves again on interest rates. Powell added that policy uncertainty makes it difficult for the US central bank to enact policy adjustments.
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.