NZD/USD trades with negative bias around 0.5825; downside seems limited

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The NZD/USD pair drifts lower during the Asian session on Wednesday and retreats further from the vicinity of a multi-month peak, around the 0.5850-0.5855 region, retested the previous day.

NZD/USD edges lower on Wednesday as the risk-off environment undermines the Kiwi.
The USD hangs near a two-week low amid Trump’s tariff threats and supports the pair.
Traders now look to the US PCE data on Thursday ahead of the NZ CPI report on Friday.

The NZD/USD pair drifts lower during the Asian session on Wednesday and retreats further from the vicinity of a multi-month peak, around the 0.5850-0.5855 region, retested the previous day. Spot prices, however, lack bearish conviction and currently trade around the 0.5825 area, down less than 0.15% for the day.

US President Donald Trump threatened to impose additional tariffs on European allies amid rising tension over Greenland. The announcement prompted ‌the European Union (EU) to weigh hitting back with previously untested economic countermeasures should the levies go ahead, fueling worries that the trade war could re-escalate. The development comes on top of persistent geopolitical uncertainties and weighs on investors' sentiment, which, in turn, undermines the risk-sensitive Kiwi.

Meanwhile, Trump's renewed tariff threats have revived the 'Sell America' trade and triggered a steep US Dollar (USD) decline since the beginning of this week. In fact, the USD Index (DXY), which tracks the Greenback against a basket of currencies, languishes near its lowest level since January 6, touched on Tuesday, despite reduced bets for more aggressive policy easing by the US Federal Reserve (Fed). This warrants some caution before positioning for deeper losses for the NZD/USD pair.

Furthermore, the Reserve Bank of New Zealand's (RBNZ) hawkish outlook on the future policy path makes it prudent to wait for strong follow-through selling before confirming that spot prices have topped out. Traders might also opt to wait for the release of the US Personal Consumption Expenditure (PCE) Price Index on Thursday, which will be accompanied by the final Q3 GDP. This, along with the quarterly New Zealand consumer inflation figures on Friday, would drive the NZD/USD pair.

Risk sentiment FAQs

What do the terms"risk-on" and "risk-off" mean when referring to sentiment in financial markets?

In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.

What are the key assets to track to understand risk sentiment dynamics?

Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.

Which currencies strengthen when sentiment is "risk-on"?

The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.

Which currencies strengthen when sentiment is "risk-off"?

The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.