The NZD/USD currency pair reached a four-day low during the Asian session on Monday. Though it rebounded slightly, trading around the mid-0.5600s, the pair faced significant downward pressure. This pressure stemmed from ongoing concerns about the US-China trade war, which has led to heightened market turbulence and economic uncertainty. As a result, investors have been shifting away from riskier assets like the New Zealand Dollar (NZD) in favor of safer options like the US Dollar (USD).
The Reserve Bank of New Zealand (RBNZ) aims to maintain an inflation rate between 1% and 3% over the medium term, with a focus on keeping it near the 2% midpoint. However, amid market turbulence, the NZD tends to weaken, as investors seek stability in more secure currencies. The current US-China trade tensions have exacerbated this trend, attracting sellers to the NZD/USD pair for three consecutive days.
Investors' sentiment has been significantly affected by the trade war, favoring the safe-haven USD and reducing demand for the Kiwi. The divergent monetary policy expectations between the US Federal Reserve and the RBNZ add to the pressure on the NZD/USD pair. Rate differentials play a crucial role, as anticipated interest rate cuts by the RBNZ contrast with the more stable rate environment expected from the Federal Reserve.
The RBNZ is likely to implement a third consecutive supersized rate cut later this month. This move further supports prospects for a depreciating NZD/USD pair, as it widens the rate differential with the US. With New Zealand's economy closely tied to China's due to their trading partnership, the Kiwi is particularly sensitive to fluctuations in the Chinese economy. The resumption of tit-for-tat policies in the US-China trade war is likely to disrupt global supply chains and weigh heavily on investor sentiment.
As market participants brace for further developments in the trade war, the NZD/USD pair remains vulnerable to additional declines. The path of least resistance for the currency pair appears to be downward, driven by persistent trade tensions and economic uncertainties. A continued preference for safe-haven assets suggests that investors will remain cautious in their approach, potentially leading to further depreciation of the NZD/USD pair.