NZD/USD extends the decline to below 0.5900 on downbeat Chinese PMI data, renewed trade tensions

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The NZD/USD pair extends its downside to around 0.5880 during the early Asian trading hours on Friday. The New Zealand Dollar (NZD) softens against the US Dollar (USD) amid escalating trade tension between the United States (US) and China.

NZD/USD weakens to near 0.5880 in Friday’s Asian session.
China's Caixin Manufacturing PMI declines to 49.5 in July, weaker than expected.
Investors will closely monitor the highly anticipated US July Nonfarm Payrolls data on Friday.

Bloomberg reported late Thursday that US President Donald Trump said he will set a baseline tariff rate of 10%, resisting prior suggestions he could raise the floor to 15% or higher. Nonetheless, trade tensions are back in the headlines as a senior US official noted that there is no final decision on trade with China. Tariff uncertainty is likely to undermine the China-proxy Kiwi in the near term, as China is a major trading partner of New Zealand.

Furthermore, the latest downbeat Chinese economic data contribute to the NZD’s downside. Data released by Caixin Insight Group and S&P Global on Friday showed that China's Manufacturing Purchasing Managers' Index (PMI) eased to 49.5 in July from 50.4 in June. This figure came in below the market consensus of 50.3.

On the USD’s front, the hawkish remarks from the Federal Reserve (Fed) provide some support to the Greenback. The Federal Open Market Committee (FOMC) voted 9-2 to hold its benchmark federal funds rate in a range of 4.25%-4.5% at its July meeting on Wednesday.

Fed Chair Powell reiterated that the Fed remains data-dependent when it comes to making monetary decisions in the coming months, adding that the US central bank will carefully monitor the labor market for any signs of weakness ahead. The US Nonfarm Payrolls (NFP) report for July will be the highlight later on Friday. In case of a weaker-than-expected outcome, this could drag the USD lower and cap the downside for the pair.

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.