NZD/USD holds losses around 0.5650 as Business NZ PSI reports a decline
- NZD/USD weakened as President Trump announced plans to direct federal agencies to review tariff policies.
- Traders speculate that Trump’s policies could drive inflationary pressures, potentially limiting the Fed to just one additional rate cut.
- Business NZ PSI fell to 47.9 in December from 49.5 in November, extending its contraction streak to ten consecutive months.
NZD/USD retraces its recent gains from the previous session, trading near 0.5650 during early European hours on Tuesday. The pair experienced volatility as US President Donald Trump's inauguration day created ripples in the markets.
The US Dollar (USD) appreciated following reports that Trump plans to direct federal agencies to review tariff policies and reassess the United States' trade relationships with Canada, Mexico, and China.
However, the NZD/USD gained some footing as the Greenback came under pressure. This was driven by Trump's apparent efforts to strengthen ties with Chinese President Xi Jinping, the TikTok deal, and hints of a potentially softer stance on tariffs.
US President Donald Trump stated, "If we make a TikTok deal and China doesn’t approve it, we could maybe put tariffs on China." This comment came after he signed an executive order delaying the enforcement of the TikTok ban by 75 days. Given the close trade relationship between China and New Zealand, any changes in China's economy could influence New Zealand's markets.
Meanwhile, the New Zealand Dollar (NZD) faced downward pressure as Business NZ's data reported a decline in the country’s Performance of Services Index (PSI). The PSI dropped to 47.9 in December from 49.5 in November, marking ten consecutive months of contraction.
Traders will closely monitor Wednesday’s Consumer Price Index (CPI) data, as the annual inflation rate is anticipated to drop to its lowest level since 2021. Markets are currently pricing in an 80% probability that the Reserve Bank of New Zealand (RBNZ) will cut its cash rate from 4.25% to 3.75% next month.
New Zealand Dollar FAQs
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.
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.
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.
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
Akhtar Faruqui
FXStreet
Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.
