New Zealand Dollar hits two-month high as US Dollar weakness offsets softer China data

NZD/USD extends its advance on Monday and trades around 0.5915 at the time of writing, up 0.37% on the day. The pair reaches its highest level since early June, mainly supported by broad-based weakness in the US Dollar (USD), while the New Zealand Dollar (NZD) shrugs off disappointing Chinese economic data.

The Kiwi remains closely tied to the outlook for the Chinese economy, as China is New Zealand’s largest trading partner. However, data released on Monday shows fresh signs of weakness in the world’s second-largest economy.

China’s Industrial Production rose 4.5% YoY in July, compared with a 5.3% increase in June and below the 5% growth expected by markets. Retail Sales also slowed to 0.6% YoY, following 1% previously and falling well short of the 1.5% increase anticipated. These figures reinforce concerns about the strength of domestic demand and China’s growth prospects in the third quarter.

The New Zealand Dollar’s limited reaction to the data, however, suggests that US Dollar dynamics remain the main driver of NZD/USD on Monday. The Greenback remains under pressure after a series of US economic releases prompted investors to scale back expectations regarding the path of interest rates.

Inflation and consumption data released in the United States (US) last week are fueling expectations of a more accommodative stance from the Federal Reserve (Fed). Easing inflationary pressures, combined with a 0.6% decline in US Retail Sales in July, weaken the case for further monetary tightening and weigh on the US Dollar.

The New Zealand Dollar also benefits from the contrast with the Reserve Bank of New Zealand (RBNZ), whose rhetoric remains relatively firm regarding inflation risks and the need to maintain restrictive monetary conditions.

Caution remains warranted, however, amid geopolitical tensions in the Middle East. A fresh escalation between the United States and Iran, as well as disruptions around the Strait of Hormuz, could revive demand for safe-haven assets and provide some support to the US Dollar. Investors will also watch Wednesday’s release of the minutes from the latest Federal Open Market Committee (FOMC) meeting for further clues about the US monetary policy outlook.

RBNZ seen on hold as softer New Zealand inflation offsets Middle East risks

Analysts at Commerzbank argue that the latest data make a back-to-back rate hike by the RBNZ unlikely at its meeting in about two weeks. “In about two weeks, the Reserve Bank of New Zealand will hold its next monetary policy meeting, and based on the inflation indicators released this morning, it seems unlikely that it will raise interest rates for a second consecutive time following the July hike,” they note.

They point out that, although “full inflation figures are released only once a quarter in New Zealand, Stats NZ publishes a Selected Price Index every month for about half of all prices, which typically reflects the trend in the full inflation figures very well.” This monthly gauge “fell to 3.5% year-over-year in July, down from 4.9% in June.” Moreover, Commerzbank highlights that “if we exclude the sharp rise in gasoline and diesel prices, the rate was actually only 2.2% in July, down from 2.8% in June.” While “global prices for oil and petroleum products were lower in July than in August” and “a slight uptick in August is certainly to be expected” given “the collapse of the ceasefire and the renewed blockade in the Strait of Hormuz,” the bank says “the decline in the core rate in particular should be a source of satisfaction for the central bank.”

On the activity side, Commerzbank sees some tentative resilience. “Positive figures for monthly aggregate credit and debit card sales, on the other hand, give reason to be confident that the economy will not suffer too severe a setback,” they write. After core card sales “had slowed sharply in June and were up only 0.4% year-over-year, they rose again by 3.5% in July.” “The overall rate also improved again, rising from 1.3% in the previous month to 3.5%.” However, the bank cautions that “these are nominal figures” and that, once “monthly inflation is factored in as an indicator, this shows that, in real terms, retail sales are still merely stagnating.”

“Overall, we therefore expect the central bank to use the decline in inflation as an opportunity to leave interest rates unchanged in September,” Commerzbank concludes. However, “in light of the renewed escalation in the Middle East, it will adopt a hawkish tone to keep all options open.” In their view, “this should provide some support for the kiwi in the coming weeks,” even as “the weak economic environment, however, is likely to continue weighing on the currency over the coming months.”

NZD/USD technical analysis

In the one-hour chart, NZD/USD trades at 0.5913, holding a constructive bullish bias as it stays above the 100-period simple moving average (SMA) at 0.5873 and the 200-period SMA at 0.5876. The pair also trades over nearby horizontal support at 0.5910 and 0.5900, while the Relative Strength Index (RSI) eases to around 62, suggesting positive but moderating upside momentum after recent overbought readings.

On the topside, immediate resistance is located at the recent horizontal cap near 0.5926; a clear break higher would open the way for a continuation of the short-term advance. On the downside, initial support is seen at 0.5910, followed by 0.5900 and 0.5885, with the 200-period and 100-period SMAs at 0.5876 and 0.5873, respectively, reinforcing a broader demand zone on deeper pullbacks.

(The technical analysis of this story was written with the help of an AI tool. Know more.)