NZD/USD gains traction to near 0.5750 as traders hope for compromise in US-China trade war

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The NZD/USD pair gains ground to near 0.5740 during the Asian trading hours on Monday. The New Zealand Dollar (NZD) strengthens against the US Dollar (USD) as traders hope the United States (US) may temper its latest escalation of the trade war with China.

NZD/USD rebounds to around 0.5740 in Monday’s Asian session.
Trump said we’re going to be fine with China.
RBNZ indicated it remains open to further rate reductions.

US President Donald Trump on Friday threatened an additional 100% tariff on Chinese goods from November 1 in retaliation for new export controls Beijing is planning for valuable rare earth minerals. On Sunday, Trump softened his tone, saying that China’s economy “will be fine” and that the US wants to “help China, not hurt it.”

Easing trade tensions between the world’s two largest economies provides some support to the China-proxy Kiwi, as China is a major trading partner of New Zealand.

Meanwhile, the US government shutdown has entered its third week. Congress remains deadlocked on a funding plan, and the Senate isn’t scheduled to hold any votes until Tuesday. A prolonged US federal shutdown could weigh on the Greenback and act as a tailwind for the pair in the near term.

On the other hand, the dovish stance of the Reserve Bank of New Zealand (RBNZ) might undermine the NZD against the USD. New Zealand's central bank cut its benchmark rate by an aggressive 50 basis points (bps) last week and kept the door open for further reductions. Financial markets are currently pricing in nearly a further 25 bps cut to 2.25% at the next interest rate decision in November.

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.