NZD/USD extends the decline below 0.5700 on downbeat Chinese PMI data, Fed’s hawkish remarks

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The NZD/USD pair attracts some sellers to around 0.5695 during the early Asian session on Tuesday. The New Zealand Dollar (NZD) weakens against the US Dollar (USD) as the latest data showed the Chinese manufacturing sector weakening last month.

NZD/USD extends its downside to near 0.5695 in Tuesday’s early Asian session.
Chinese RatingDog Manufacturing PMI eased to 50.6 in October vs. 50.9 expected.
Fed’s Powell said further reductions were “not a foregone conclusion.

Data released by RatingDog on Monday showed that China's RatingDog Manufacturing Purchasing Managers' Index (PMI) declined to 50.6 in October, versus 51.2 prior. This figure came in worse than the estimation of 50.9. The weaker-than-expected Chinese PMI data could drag the China-proxy Kiwi lower, as China is a major trading partner for New Zealand.

The Federal Reserve (Fed) delivered its second interest rate cut of the year, lowering the benchmark rate to between 3.75% and 4.00%. Chair Jerome Powell hinted during the press conference that a further reduction in the policy rate at the December meeting is not a foregone conclusion, and traders now see only about a 70% probability of a cut in December, down from 93% a week ago. The hawkish tone of the Fed could underpin the Greenback and act as a headwind for the pair.

The US federal shutdown has entered its sixth week and is poised to become the longest in US history, with Republican and Democratic lawmakers in Congress no closer to ending their budget standoff. Fears of a prolonged US government shutdown might drag the USD lower and help limit the pair’s losses.

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.