NZD/USD tumbles below 0.5600 on bullish US Dollar, all eyes on US NFP data

NZD/USD declines to around 0.5585 in Friday’s early European session, down 0.25% on the day.
The prospect of a slower pace of Fed rate cuts could boost the USD against the NZD.
The US December Nonfarm Payrolls data will be closely watched on Friday.

Lallalit Srijandorn FXStreet

The NZD/USD pair attracts some sellers to around 0.5585 during the early European trading hours on Friday. The pair remains under selling pressure amid the strengthening US Dollar (USD) due to heightened expectations that the US Federal Reserve (Fed) will move forward cautiously with future rate cuts. All eyes will be on the US Nonfarm Payrolls (NFP) report for December, which is due later on Friday.

The US Dollar index (DXY), a measure of the USD's value relative to its most significant trading partners' currencies, is set for a sixth consecutive weekly gain and currently trades near 103.35. The firmer Greenback is underpinned by rising bond yields and expectations of another strong US economic data.

The Fed decided to lower its policy rate of interest a full percentage point in the final three meetings of 2024 but is expected to leave the rate steady in the current 4.25% to 4.5% range at the upcoming January policy meeting. According to the CME FedWatch tool, traders have priced in nearly a 93.1% odds that the Fed will pause the rate cut this month.

On the other hand, the dovish bets of the Reserve Bank of New Zealand (RBNZ) and the deflationary pressures in China could drag the Kiwi lower. Data released on Thursday showed China’s Consumer Price Index (CPI) remained close to flat in December, stoking deflation worries. Any signs of weakness in China’s economy are likely to undermine the New Zealand Dollar (NZD), as China is a major trading partner to New Zealand.

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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