The NZD/USD currency pair has tanked to historic lows. It currently trades closer to 0.5640, after hitting its weakest point since April 10. This large decrease is due to three main factors. The New Zealand economy is worsening. Recent macroeconomic data has been pretty bad. External macroeconomic forces such as the current US federal shutdown and the condition of the Chinese economy are in the mix.
The valuation of the NZD/USD pair is inherently linked to the economic health of New Zealand and the monetary policy set forth by its central bank. The New Zealand and United States rate differential plays a major role in determining the value of the pair. That difference is an essential missing piece of the market dynamic. The market continues to be dealt many variables and unknowns. The key question now is how these varying sets of economic circumstances will affect the Kiwi’s strength compared to the US dollar.
Economic Indicators and Employment Trends
Looking at recent employment data from New Zealand, it suggests employment levels have plateaued for the last three months. This marks a major departure from expectations, which called for a 0.1% increase. This stagnation creates fears about our nation’s economic future. It exacerbates concerns about a potential long-term recession.
These employment figures are important not just to the thousands of New Zealanders they impact, but because they show how well New Zealand’s economy is faring. First, investors continue to pay close attention to each macroeconomic data release. These releases are key drivers of NZD valuation so any surprises can produce drastic moves. A weak labor market can lead to diminished consumer spending and lower economic growth expectations, contributing to downward pressure on the currency.
Traders sometimes refer to the NZD/USD pair the “China-proxy Kiwi.” This nickname is due to the fact that it is especially sensitive to shifts in the state of China’s economy. As New Zealand’s largest trading partner, fluctuations in China’s economic performance can directly impact New Zealand’s export levels and, consequently, its currency valuation. Deteriorating conditions in China could suggest a decline in demand for New Zealand’s exports, further straining its economy and currency.
Impact of US Federal Shutdown
The continuing US federal shutdown, which is now in its sixth week, adds further downside risk for the NZD/USD cross. The Senate just came up short on a short-term continuing resolution. Doing so would risk the government’s first and longest federal funding lapse in US history. As such uncertainty looms over US government operations, it can be expected to be detrimental to investor confidence in the Greenback.
In particular, fears of a drawn-out shutdown might wreak havoc on the US economy. This vagueness could lead to a further depreciation of the dollar with respect to other currencies, including the Kiwi. With markets adapting to all of this, traders have become more worried about how things far outside their control could affect the value of their currencies.
Complicating this challenge are recent turns in the US-China trade relations. US President Donald Trump announced a reduction in fentanyl-related tariffs on imports from China, lowering rates from 20% to 10%. While some reciprocal levies on Chinese goods will remain frozen, this move signals a potential thawing in trade tensions that could benefit both countries’ economies.
The Role of China in New Zealand’s Economic Outlook
The performance of China’s economy has profound implications for New Zealand’s export-driven market. Bad news for China’s economic outlook is typically bad news for demand for New Zealand exports. This change should certainly damage New Zealand’s currency. As such, market participants are closely monitoring any macroeconomic indicators from China that may signal changes in demand for Kiwi goods and services.
Fortunately, a run of positive news on US‐China trade talks could provide support for the NZD, helping it cope with these threats. If trade negotiations are concluded positively, market confidence will go through the roof. This would raise expectations across New Zealand for exports to China.