NZD/USD edges lower to near 0.5950 amid solid US Dollar, dovish RBNZ

• NZD/USD depreciates as the US Dollar receives support from Trump’s potential fiscal policies.
• The NZD struggles as the Trump administration may impose a 60% tariff on imports from China.
• Trump’s proposed fiscal policies could lead the Fed to adopt a more hawkish monetary policy.

The NZD/USD pair remains subdued near 0.5950 during European trading hours on Tuesday. Concerns are mounting that President-Elect Donald Trump’s expected tariff increases on Chinese goods could pressure the NZD, given New Zealand's close trade relationship with China.

Morgan Stanley’s analysis divides the Trump administration's macroeconomic policies into three primary areas: tariffs, immigration, and fiscal measures. The report anticipates that tariff policies will take precedence, with expectations for an immediate 10% tariff increase globally and a more substantial 60% increase targeting Chinese imports.

Adding to downward pressure on the NZD, China’s recent stimulus measures have underwhelmed investor expectations, weakening demand prospects for New Zealand's largest trading partner. Last week, China introduced a 10 trillion Yuan debt package but refrained from implementing direct economic stimulus measures, disappointing markets.

Meanwhile, the Reserve Bank of New Zealand (RBNZ) is anticipated to announce a more substantial 75 basis point rate cut later this month due to the significant time between meetings. A 50 basis point cut has already been fully priced in by markets.

The US Dollar (USD) continues to gain strength following the confirmation of Trump’s victory in the US election. Market analysts believe that Trump’s proposed fiscal policies could stimulate investment, spending, and labor demand, potentially heightening inflation risks. This could lead the Federal Reserve (Fed) to adopt a more hawkish monetary policy.

However, Federal Reserve Chair Jerome Powell stated on Thursday that he doesn’t anticipate Trump’s potential return to the White House impacting the Fed’s near-term policy decisions. “We don’t guess, speculate, and we don’t assume what future government policy choices will be,” Powell noted after the bank decided to lower interest rates by 25 basis points to a range of 4.50%-4.75%, as expected.

New Zealand Dollar FAQs

What key factors drive the New Zealand Dollar?

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.

How do decisions of the RBNZ impact the New Zealand Dollar?

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.

How does economic data influence the value of the New Zealand Dollar?

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.

How does broader risk sentiment impact the New Zealand Dollar?

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.

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