NZD/USD falls toward 0.6000 after retreating from eight-month highs
- NZD/USD loses ground as Terms of Trade Index (Q1) increased 1.9% QoQ in New Zealand, below an expected 3.1% rise.
- China's Caixin Manufacturing Purchasing Managers' Index contracted to 48.3 in May, against a 50.4 expansion in April.
- US ISM Manufacturing Purchasing Managers’ Index contracted to 48.5 in May from 48.7 in April.
NZD/USD pulls back from an eight-month high of 0.6055, trading around 0.6010 during the Asian hours on Tuesday. The pair depreciates as the New Zealand Dollar (NZD) struggles, possibly due to softer-than-expected Terms of Trade Index data, which increased 1.9% quarter-on-quarter in the first quarter, down from a 3.1% increase in the previous quarter and below market forecasts for a similar 3.1% rise. Export prices rose 7.1%, the largest rise in three years, while import prices climbed 5.1%, the biggest increase in 10 quarters.
Moreover, China's Caixin Manufacturing Purchasing Managers' Index (PMI) unexpectedly declined to 48.3 in May from the previous reading of 50.4, below the expected 50.6 expansion. However, the weekend data showed that the National Bureau of Statistics (NBS) Manufacturing PMI rose to 49.5 in May, from April’s 49.0 reading. The NZD could be impacted by Chinese economic data as both countries are close trading partners.
Last week, the Reserve Bank of New Zealand (RBNZ) Assistant Governor Karen Silk noted that interest rates are now within the neutral 2.5%–3.5% band following a 25 basis points rate cut. Silk also said that further policy decisions will be data-dependent.
However, the NZD/USD pair may regain its ground as the US Dollar (USD) may continue to struggle amid growing concerns regarding stagflation in the United States (US). US President Donald Trump threatened to double import tariffs on steel and aluminum, increasing them to 50% from 25%, effective Wednesday.
Institute for Supply Management (ISM) Manufacturing Purchasing Managers’ Index eased to 48.5 in May from 48.7 in April. This figure came in weaker than the expectation of 49.5. Traders would likely observe the release of the JOLTS Job Openings later on Tuesday.
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.