Key Takeaways
- The NZD/USD pair is seeing some buyer interest near 0.5740, supported by easing US-China trade tensions.
- President Trump’s softer tone on trade and confirmation of a meeting with Xi Jinping have helped mitigate concerns.
- The ongoing US federal government shutdown, now in its third week, could pressure the US Dollar.
- Upcoming US CPI data will be a key focus, with hotter-than-expected inflation potentially boosting the USD.
NZD/USD Price Action and Trade Tensions
The NZD/USD pair attracted buyers near 0.5740 during the early Asian session. Easing concerns over US-China trade tensions provided some support to the New Zealand Dollar (NZD), a China-proxy currency, against the US Dollar (USD).
US President Donald Trump indicated that a proposed 100% tariff on Chinese goods would not be sustainable. He attributed the latest impasse in trade negotiations to Beijing’s tightening control over rare-earth shipments. Trump also stated his intention to meet with Chinese President Xi Jinping and expressed admiration for the Chinese leader.
This softened tone and confirmation of a meeting with Xi helped to mitigate trade tensions between the world’s two largest economies. Consequently, this supports the China-proxy Kiwi, given China’s significant role as a major trading partner for New Zealand.
Impact of US Government Shutdown on USD
The US federal government shutdown has extended into its third week with no clear resolution in sight, stemming from a partisan dispute in the Senate over federal funding priorities. This shutdown is now the third-longest funding lapse in modern history.
On Monday, the GOP-backed bill failed to pass the Senate for the eleventh time, with a 50-43 vote largely along party lines. Fears that a prolonged US government shutdown could negatively impact economic activity may exert some selling pressure on the Greenback, potentially acting as a tailwind for the NZD/USD pair in the near term.
Upcoming US Inflation Data
The US September Consumer Price Index (CPI) inflation data is set to be a major focus later on Friday, especially due to a data drought driven by the government shutdown. Both headline and core CPI are anticipated to show a year-over-year rise of 3.1% in September.
📊 Any indication of inflation exceeding expectations could strengthen the USD against the NZD.
Understanding the New Zealand Dollar
What Drives the NZD?
The New Zealand Dollar (NZD), often referred to as the Kiwi, is a frequently traded currency. Its valuation is primarily influenced by the health of the New Zealand economy and the monetary policy set by the country’s central bank. However, several unique factors can also impact NZD’s movement.
The performance of the Chinese economy significantly affects the Kiwi, as China is New Zealand’s largest trading partner. Negative economic news from China can lead to reduced New Zealand exports, impacting the economy and, consequently, its currency.
💡 Dairy prices are another critical factor, with the dairy industry being New Zealand’s main export. High dairy prices boost export earnings, contributing positively to the economy and thus to the NZD.
RBNZ Policy and Interest Rates
The Reserve Bank of New Zealand (RBNZ) endeavors to maintain an inflation rate between 1% and 3% over the medium term, targeting the 2% mid-point. To achieve this, the RBNZ adjusts interest rates.
When inflation is elevated, the RBNZ may increase interest rates to moderate the economy. This action can also lead to higher bond yields, making New Zealand a more attractive investment destination and thereby boosting the NZD. Conversely, lower interest rates typically weaken the NZD.
⚡ The rate differential, which compares interest rates in New Zealand to those set by international central banks like the US Federal Reserve, can play a crucial role in the NZD/USD pair’s performance.
Economic Indicators and Market Sentiment
Macroeconomic data releases from New Zealand are vital for assessing the country’s economic health and can influence the New Zealand Dollar’s valuation. A robust economy, characterized by strong economic growth, low unemployment, and high confidence, generally benefits the NZD.
Strong economic growth tends to attract foreign investment and may prompt the RBNZ to consider increasing interest rates if accompanied by rising inflation. Conversely, weak economic data often leads to a depreciation of the NZD.
📍 The New Zealand Dollar tends to strengthen during risk-on periods, when market participants perceive lower risks and are optimistic about economic growth. This environment often favors commodities and commodity-linked currencies like the Kiwi. Conversely, the NZD often weakens during times of market turbulence or economic uncertainty, as investors typically divest from higher-risk assets in favor of safer havens.
Expert Summary
Easing US-China trade tensions and potential headwinds from the US government shutdown are currently influencing the NZD/USD. Investors are closely watching upcoming US inflation data for further direction.