NZD/USD drops toward 0.6300 ahead of US manufacturing data

NZD/USD loses ground following the remarks from Fed’s Powell saying lowering interest rate ‘over time.’
US ISM Manufacturing PMI is expected to improve to 47.5 in September, from the previous 47.2 reading.
New Zealand’s Building Permits declined 5.3% MoM in August, swinging from a significant 26.4% increase in the prior month.

NZD/USD trades around 0.6310 during the European hours on Tuesday, breaking its three-day winning streak. On Monday, Federal Reserve (Fed) Chairman Jerome Powell said the central bank is not in a hurry and will lower its benchmark rate ‘over time,’ which has supported the US Dollar (USD) and undermined the NZD/USD pair.

However, the subdued US Treasury yields may limit the upside of the US Dollar. The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against other six major currencies, extends its gains for the second successive day. The DXY trades around 101.00 with 2-year and 10-year yields on US Treasury bonds standing at 3.62% and 3.76%, respectively, at the time of writing.

Traders await US manufacturing data including ISM Manufacturing PMI later in the North American session, which is expected to improve to 47.5 in September, from the previous 47.2 reading. This report may provide a reliable outlook on the state of the US manufacturing sector.

Seasonally adjusted Building Permits in New Zealand showed a 5.3% month-on-month decline in August, following a significant 26.4% increase in the prior month. This reflects a slowdown in the issuance of consents for new dwellings. Additionally, the NZIER Business Confidence index dropped by 1% quarter-on-quarter in the third quarter, showing an improvement compared to the 44% decline observed in the previous quarter, though overall sentiment remains cautious.

The Reserve Bank of New Zealand (RBNZ) responded to slowing economic growth by beginning to ease its policy in August, a trend that may extend into the fourth quarter. The main uncertainty lies in the speed of rate cuts, with most economists predicting a 25 basis point reduction at each of the two remaining meetings this year, aligning with Governor Adrian Orr's commitment to a gradual approach.

The New Zealand (NZ) Treasury’s economic assessment, released on Tuesday, indicated that they “don't expect activity to have picked up much in the latest quarter.” While GDP for the June quarter declined by 0.2%, the drop was smaller than anticipated, with population growth concealing underlying economic weakness. As a substantial amount of data is set to be released in the next two weeks, we should soon have a clearer understanding of where the economy stands in the current cycle.

Economic Indicator

ISM Manufacturing PMI

The Institute for Supply Management (ISM) Manufacturing Purchasing Managers Index (PMI), released on a monthly basis, is a leading indicator gauging business activity in the US manufacturing sector. The indicator is obtained from a survey of manufacturing supply executives based on information they have collected within their respective organizations. Survey responses reflect the change, if any, in the current month compared to the previous month. A reading above 50 indicates that the manufacturing economy is generally expanding, a bullish sign for the US Dollar (USD). A reading below 50 signals that factory activity is generally declining, which is seen as bearish for USD.

Why it matters to traders?

The Institute for Supply Management’s (ISM) Manufacturing Purchasing Managers Index (PMI) provides a reliable outlook on the state of the US manufacturing sector. A reading above 50 suggests that the business activity expanded during the survey period and vice versa. PMIs are considered to be leading indicators and could signal a shift in the economic cycle. Stronger-than-expected prints usually have a positive impact on the USD. In addition to the headline PMI, the Employment Index and the Prices Paid Index numbers are watched closely as they shine a light on the labour market and inflation.

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