NZD/USD weakens below 0.6050 on renewed US Dollar demand, eyes on US CPI data

NZD/USD softens to near 0.6030 in Wednesday’s early European session.
The US and China agreed on a framework to implement their trade truce.
The RBNZ might slow the pace of rate cuts as uncertainty grows.

Lallalit Srijandorn FXStreet

The NZD/USD pair attracts some sellers to around 0.6030 during the early European session on Wednesday, bolstered by renewed US Dollar (USD) demand. Investors assess the result of trade talks between the United States and China ahead of the US May Consumer Price Index (CPI) inflation data, which will be released later on Wednesday.

The Greenback edges higher after the report early Wednesday that the US and China agreed to a preliminary deal on how to implement the consensus the two sides reached in Geneva. US negotiators stated that they “absolutely expect” that issues around shipments of rare earth minerals and magnets will be resolved with the framework implementation, even though the full details of their agreement weren’t immediately available. Analysts expect a potential trade deal between the world's two biggest economies could boost the USD broadly.

Meanwhile, Wednesday’s US inflation data is expected to show US consumers probably saw slightly faster inflation in May. The headline CPI is forecast to see an increase of 2.5% YoY in May, while the core CPI is projected to see a rise of 2.9% YoY in the same period.

If the report showed hotter inflation in the US, this may reinforce the Federal Reserve’s (Fed) wait-and-see stance as it assesses the impact of tariffs, with traders increasingly betting that the US central bank will cut interest rates just once this year. This, in turn, might underpin the Greenback and create a headwind for the pair in the near term.

On the other hand, the rising expectation that the Reserve Bank of New Zealand (RBNZ) will slow the pace of interest rate cuts might help limit the NZD’s losses. “While the RBNZ downgraded its economic forecasts compared to February and emphasized the high degree of uncertainty around global conditions, there was a surprising amount of caution around the timing and extent of further OCR cuts,” said Westpac senior economist Michael Gordon.

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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