NZD/USD gains traction above 0.5650 ahead of US NFP release

NZD/USD trades in positive territory around 0.5680 in Friday’s Asian session.
The employment report keeps the RBNZ on track to cut by 50 bps in February.
Fed officials said uncertainty creates the environment for the Fed to slow the pace of cuts.

Lallalit Srijandorn FXStreet

The NZD/USD pair trades firmer near 0.5680 during the Asian trading hours on Friday. However, the upside for the pair might be limited ahead of the highly anticipated US Nonfarm Payrolls (NFP) data for January, which is due later on Friday.

China filed a World Trade Organization challenge on Wednesday against US President Donald Trump's new 10% tax on Chinese imports and withdrawal of a duty-free exemption for low-value packages, citing "protectionist" acts that violate WTO regulations. Investors will closely monitor the development surrounding renewed trade war tensions between the US and China, the world's two largest economies. Any signs of escalation could weigh on the China-proxy Kiwi, as China is a major trading partner to New Zealand.

The New Zealand employment data for the fourth quarter (Q4) will keep the Reserve Bank of New Zealand (RBNZ) on track to cut the Official Cash Rate (OCR) this month. This, in turn, might further weigh on the New Zealand Dollar (NZD). The markets are now pricing in nearly 92% odds that the RBNZ will deliver a 50 basis points (bps) rate cut to 3.75% on February 19. It would be the third consecutive jumbo cut.

The hawkish stance from the Federal Reserve (Fed) officials might provide some support to the Greenback. Chicago Fed President Austan Goolsbee noted on Thursday that the uncertainty makes the environment for the Fed foggier, a reason to slow the pace of cuts. Meanwhile, Fed Vice Chairman Philip Jefferson said late Tuesday that they were facing uncertainty around Trump’s policies, adding that the robust economy would allow them to adopt a cautious approach to further policy-easing.

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.

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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