NZD/USD drifts lower below 0.5650 as China’s Trade Surplus narrows in October

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The NZD/USD pair attracts some sellers near 0.5620 during the Asian trading hours on Friday. The New Zealand Dollar (NZD) weakens against the US Dollar (USD) after a narrowing of China’s trade surplus in October and a weak New Zealand jobs report.

NZD/USD declines to around 0.5620 in Friday’s Asian session.
China's trade surplus came in at $90.07 billion in October, narrowing from $90.45 billion in September and missing expectations.
Signs of weakness in US private sector surveys could prompt the Fed to lower rates at the December meeting.

Data released by the General Administration of Customs of the People’s Republic of China on Friday showed that China’s trade surplus came in at $90.07 billion in October versus $90.45 billion prior. This figure came in below the forecast of $95.60 billion.

Meanwhile, Exports rose by 1.1% year-over-year in October, missing expectations for a 3.0% gain. Imports increased 1.0% year-over-year in October, compared to 7.4% in September, below the market consensus of 3.2%. A narrowing of China’s trade surplus in October could weigh on the China-proxy Kiwi, as China is a major trading partner for New Zealand.

Additionally, New Zealand’s Unemployment Rate climbed to 5.3% in the third quarter (Q3), the highest level since 2016. The weak jobs report sealed the case for a rate cut from the Reserve Bank of New Zealand (RBNZ) this month, which exerted some selling pressure on the NZD. Most economists expect another 25 basis points (bps) reduction at the final meeting of the year on November 26.

US Challenger jobs data indicated a spike in US job cuts, suggesting a possible cooling in US labor market conditions. The Challenger report showed that companies cut over 150,000 jobs in October, marking the biggest reduction for the month in more than 20 years.

Traders ramped up bets on a rate cut following US Challenger jobs data, which weighed on the Greenback against the NZD. Trading in Fed funds futures implies a 70% possibility of a reduction at the US central bank's next meeting, up from a 62% probability a day earlier, according to the CME FedWatch tool.

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.