New Zealand Dollar holds steady on mixed China's inflation releases, US CPI data looms

NZD/USD flatlines near 0.7030 in Wednesday's Asian session.
China’s CPI rose 1.2% YoY in May, softer than expected.
Traders await the US May CPI report later on Wednesday.

Lallalit Srijandorn FXStreet

The NZD/USD pair holds steady around 0.7030 during the Asian trading hours on Wednesday. The New Zealand Dollar (NZD) steadies against the US Dollar (USD) following China’s economic data. All eyes will be on the US May Consumer Price Index (CPI) inflation report later on Wednesday.

Data released by the National Bureau of Statistics of China on Wednesday showed that China’s PPI climbed 1.2% YoY in May, compared to a rise of 1.2% in April. This figure came in softer than the market expectations of 1.3%. The annual CPI inflation arrived at -0.1% MoM in May, versus an increase of 0.3% prior, hotter than the expectation of a 0.2% decline.

Meanwhile, China’s Producer Price Index (PPI) jumped 3.9% YoY in May, following a 2.8% increase in April. The data came in above the market consensus of a 3.8% rise. The mixed China CPI and PPI data fail to boost China’s proxy Kiwi as markets remain cautious ahead of the key US inflation report.

Traders will keep an eye on the US CPI report later in the day. The headline US CPI is expected to show a rise of 4.2% YoY in May, compared to 3.8% in April, while the core CPI is projected to show an increase of 2.9% YoY during the same period, versus 2.8% prior. If the reports show hotter-than-expected outcomes, this could lift the Greenback and create a headwind for the pair.

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.

Markets are now pricing in a 47% probability of a quarter-point rate hike in December, up from just about 14% a month ago, according to the CME FedWatch tool.

Author

Lallalit Srijandorn

FXStreet

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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