NZD/USD picks up above 0.5750 ahead of US manufacturing activity data

NZD/USD ticks up above 0.5750, turns positive on the day.
The US Dollar appreciated across the board amid growing geopolitical risks.
Investors await the US ISM Manufacturing PMI figures, due later today.

Guillermo Alcala FXStreet

The New Zealand Dollar has reversed previous losses during Monday’s European session, and is posting minor gains, trading above 0.5760 at the time of writing, yet still well below late December highs, at the 0.5850 area.

The Kiwi Dollar depreciated 1% last week, as the US Dollar rallied across the board, following upbeat US home sales and employment data. These figures improved investors’ sentiment about the US economic momentum and eased pressure on the Federal Reserve (Fed) to cut interest rates further in the near term.

On Monday, a more cautious market sentiment weighed on the risk-sensitive NZD, in the aftermath of the US intervention in Venezuela. US President Trump seized Nicolas Maduro, who is expected to appear in a US federal court on Monday, threatened Mexico and Colombia, and mentioned the annexation of Greenland by the United States.

In the US, the focus today is on the release of December’s ISM Manufacturing PMI, the first release of a data-heavy week, which includes a stream of employment indicators and ends on Friday with the release of the key Nonfarm Payrolls report.

In New Zealand, the strong Gross Domestic Product (GDP) reading released in December has boosted hopes that the Reserve Bank of >New Zealand (RBNZ) might have reached its terminal rate. RBNZ Governor, Ann Breman, confirmed those views, suggesting that the bank's monetary policy is likely to remain unchanged for an extended period and that the next move will probably be a rate hike.

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

Guillermo Alcala

FXStreet

Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.

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