New Zealand Dollar softens to near 0.5900 despite robust China services PMI data

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The NZD/USD pair attracts some sellers to around 0.5910 during the early European trading hours on Wednesday. The New Zealand Dollar (NZD) extends its downside as the peace deal between the United States (US) and Iran remains elusive.

NZD/USD weakens to near 0.5910 in Wednesday’s early European session.
Iran targeted Kuwait and Bahrain as the US conducts fresh strikes.
China’s Services PMI grew at the fastest pace in three months.

The US Central Command (CENTCOM) said on Tuesday that Iran launched ballistic missiles toward regional neighbors Kuwait and Bahrain but failed to hit targets. CENTCOM further stated that the US military conducted strikes on Iran's Qeshm Island in response to the attempted attacks.

Meanwhile, Iranian media reported on Tuesday that Tehran has not communicated with Washington for a few days, though US President Donald Trump stated that negotiations had been going on continuously. Escalating tensions in the Middle East could boost a safe-haven currency such as the US Dollar (USD) and create a headwind for the pair in the near term.

The upbeat Chinese economic data fails to support the China-proxy Kiwi. China's services activity expanded at the fastest pace in three months in May, with the Services PMI rising to 54.4 from 52.6 in April. This figure came in stronger than the market expectations of 52.3.

The attention will shift to the US May employment data later on Friday, as it might offer some hints about the US interest rate path. Any signs of weakening in the US labour market could weigh on the Greenback 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.