NZD/USD remains below 0.5650 after paring losses, US PCE eyed
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Akhtar Faruqui
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20 Dec @ 07:15 (GMT+0)

NZD/USD remains below 0.5650 after paring losses, US PCE eyed

  • NZD/USD may further depreciate due to increased risk aversion.
  • Traders adopt caution after the release of better-than-expected economic data from the United States.
  • New Zealand's trade deficit narrowed in November, due to an increase in exports and a decrease in imports.

NZD/USD recovers daily losses to halt its losing streak, trading around 0.5640 during the early European hours on Friday. The downside risks for the pair seem possible due to the improved US Dollar (USD). This could be attributed to the increased risk aversion following the hawkish 25 basis point rate cut by the Federal Reserve (Fed) at its December policy meeting. Traders will likely observe the US Personal Consumption Expenditures (PCE) data, scheduled to be released by the US Bureau of Economic Analysis on Friday.

Moreover, the US Dollar strengthened after the release of better-than-expected key economic data from the United States (US). US Gross Domestic Product (GDP) Annualized reported a 3.1% growth rate in the third quarter, surpassing both market expectations and the previous reading of 2.8%. Additionally, Initial Jobless Claims dropped to 220,000 for the week ending December 13, down from 242,000 in the prior week and below the market forecast of 230,000.

In New Zealand, the trade deficit narrowed in November, driven by a rise in exports and a drop in imports. The country recorded a trade deficit of NZD 437 million in November, a significant improvement from the NZD 1,658 million deficit in October. Meanwhile, exports grew by 9.1% year-on-year to NZD 6.48 billion, while imports decreased by 3.9% to NZD 6.92 billion.

The New Zealand Dollar (NZD) encountered difficulties after weaker-than-expected GDP data for Q3, which heightened expectations for more aggressive monetary policy easing by the Reserve Bank of New Zealand (RBNZ). Markets have fully priced in a significant 50 bps rate cut at the central bank’s February meeting.

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.