NZD/USD extends downside to near 0.5950 on the bullish US Dollar

• NZD/USD softens to around 0.5960 in Tuesday’s Asian session. 
• The firmer USD continues to undermine the pair. 
• New Zealand’s two-year inflation expectations rose to 2.12% in Q4 vs. 2.03% prior. 

The NZD/USD pair extends the decline to near 0.5960 during the early Asian session on Tuesday. The New Zealand Dollar (NZD) weakens against the Greenback amid concerns about possible tariffs by Donald Trump's incoming administration. 

Economists expect Trump’s combination of proposed tariffs and tax cuts would put new pressure on inflation and balloon the deficit, making it more challenging for the US Federal Reserve (Fed) to cut the interest rates. According to the CME FedWatch Tool, the markets have priced in nearly 65.3% of the 25 basis points (bps) rate cut by the Fed at the December meeting, down from 75% last week. The odds that the Fed would hold rate steady stand at 34.7%. 

Investors await a slew of Fed speakers and the US October Consumer Price Index (CPI) data this week for fresh interest rate guidance. Any signs of hotter inflation might diminish the possibility of a December rate reduction, boosting the Greenback. 

On the Kiwi front, Donald Trump’s victory in the US elections has raised the specter of higher tariffs on China. This, in turn, could weigh on the China-proxy NZD against the USD as China is a major trading partner for New Zealand. 

New Zealand’s two-year inflation expectations inched higher to 2.12% in the fourth quarter, up from 2.03% in Q3, according to the Reserve Bank of New Zealand’s (RBNZ) latest monetary conditions survey on Monday. Expectations for one-year ahead annual inflation eased to 2.05% in Q4 from 2.40%. The RBNZ trimmed the Official Cash Rate (OCR) by 50 bps to 4.75% on November 27 and is expected to reduce rates by another 50 bps at the November 27 meeting. 

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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