The NZD/USD currency pair had a robust one to begin the week. It has traded in an extremely tight band just under the mid-0.5700s. Having touched a new nearly one-month high on Friday, the pair continues to consolidate its recent robust advances. Many factors are driving this performance, but perhaps most notable is the impact of economic data out of both New Zealand and China, its biggest trading partner.
Recent developments indicate that the value of the NZD/USD pair is closely tied to the health of New Zealand’s economy and the monetary policy decisions made by the Reserve Bank of New Zealand (RBNZ). Moreover, upswings and downswings in China’s economy are a leading factor in identifying the current trends of this currency pair.
New Zealand’s Economic Indicators and Central Bank Policy
The recent interventions by the RBNZ have made substantial impact on the NZD/USD currency pair. Certainly, last week, the Reserve Bank of New Zealand announced a widely telegraphed 25 basis points (bps) cut. This decision is consequently the conclusion of its easing cycle. We believe this increase deepens the fundamental case for a bullish NZD/USD view. Market participants are vigorously recalibrating their outlooks to account for changes to the policy path.
These trailing indicators affect expectations for New Zealand monetary policy and traders closely scrutinize all notable New Zealand macro data releases. These indicators are essential to understanding the full picture of our economy’s health. A hawkish economic forecast will put a tailwind behind the NZD. By contrast, even the slightest bad news might lead to a decline in its value relative to the US dollar.
The rate differential between New Zealand and the US Federal Reserve plays a critical role in determining the performance of the NZD/USD pair. As of this writing, there was more than an 85% probability that the Federal Reserve will reduce borrowing costs in its next meeting. This expectation could cause the USD to underperform relatively more, which would be another bullish input for the NZD.
Impact of China’s Economic Performance
As New Zealand’s top trading partner, China’s economic performance has a big impact on the direction of the NZD/USD currency pair. China’s manufacturing sector, as reflected in recent official PMIs, has now contracted for the third consecutive month. This continued decline is an issue, raising alarms about the future demand for New Zealand’s exports. A measure of activity in China’s vast nonmanufacturing sector contracted for the first time in almost three years. This decline, unfortunately, foreshadows bigger economic issues on the horizon.
Consequently, bad news from China could mean reduced exports from New Zealand, negatively impacting its economy and thus influencing the NZD/USD pair’s performance. So traders are certainly watching all of these changes very carefully. Should China’s economic indicators continue to deteriorate, it could put upward pressure on the New Zealand dollar.
Recent government moves to support consumption and mend fences with Western countries are a hopeful sign. These steps have been supportive for the NZD/USD cross. Short-term market response to these new measures has been tepid as traders assess their longer-term impacts.
Future Expectations and Market Sentiment
This underpinning bullish tone surrounding the NZD/USD pair puts the door open for further appreciating price. This outlook is predicated on both domestic and global economic handstrokes. Market participants watch all of New Zealand’s macroeconomic data releases like hawks. These reports will assume an especially important role in anticipating future direction in the currency pair.
Second, market sentiment toward risk, or lack thereof, is a key driver of the NZD/USD pair’s performance. This is because the Kiwi is generally considered a riskier asset in comparison to the safe-haven Greenback. As such, major changes in global market conditions can trigger dramatic shifts in the currency pair.