NZD/USD softens to near 0.5950 as China’s deflation concerns persist
- NZD/USD weakens to around 0.5950 in Wednesday’s early Asian session.
- Softer than expected US CPI data has strengthened expectations that the Fed may cut the interest rate in September.
- China’s July PPI fell more than expected, underscoring weak demand and ongoing trade uncertainty.
The NZD/USD pair loses traction near 0.5950 during the early Asian session on Wednesday. The New Zealand Dollar (NZD) softens against the US Dollar (USD) despite rising bets for a Federal Reserve (Fed) September rate cut. Traders will take more cues from Fedspeak later on Wednesday.
Investors continue to assess the latest US inflation readings amid speculation of two interest rate cuts by the Fed in the latter half of the year. Fed officials have recently expressed growing concerns about the labor conditions, which might lead to interest rate cuts and could drag the Greenback lower and cap the downside for the pair.
Markets are now pricing in nearly a 94% possibility of a rate cut next month, up from 85% odds before the Consumer Price Index (CPI) data release, according to the CME’s FedWatch tool. Traders also raise their bets on rate cuts in October and December.
China’s Producer Price Index (PPI) fell 3.6% year-on-year in July, extending a two-year decline and missing estimates. This report suggested that weak domestic demand and global trade uncertainty continued to weigh on the economy. Concerns over persistent deflationary pressure in China might undermine the China-proxy Kiwi, as China is a major trading partner of New Zealand.
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.