NZD/USD dives further, nears 0.5700 on weak Chinese data, risk aversion

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The New Zealand Dollar depreciates further, nearing 0.5700.
Weak data from China and dovish comments by RBNZ's Gai are weighing on the Kiwi.
The US Dollar remains bid amid higher US yields, following the Fed's "hawkish cut".

The New Zealand Dollar (NZD) is trading lower for the third consecutive day on Friday, trading at 1.1720 at the time of writing and on track for a 0.45% weekly decline, after having been rejected at 0.5800 earlier in the week. A combination of weak manufacturing data from China, a stronger US Dollar following a hawkish message from the Fed, and a mild risk aversion is weighing on the Kiwi.

The Chinese NBS Purchasing Managers Index, released earlier on Friday, revealed that factory activity contracted to a 49.0 reading in October, from 49.8 in September, and below market expectations of a 49.6 reading, weighed by a decline in domestic demand, supply chain disruptions, and global economic pressures.

RBNZ's Gai warns about New Zealand's economic outlook

Somewhat later, the Reserve Bank of New Zealand (RBNZ) Monetary Policy Committee member Prasanna Gai added bearish pressure on the NZD, assessing that US tariffs are a "negative demand shock" for New Zealand and that they are acting as headwinds to an already restrained economic growth.

Gai affirmed in an event in Melbourne that these shocks, coupled with the high global uncertainty, have offset some of the central bank's monetary easing cycle, strengthening the case for further rate cuts in the near term.

The US Dollar, on the other hand, remains bid following the hawkish message by the Federal Reserve Chairman, Jerome Powell, following a widely expected interest rate cut on Wednesday. Powell said that a rate cut in December is dar from a foregone conclusion, boosting US Treasury yields and dragging the US Dollar higher with them.

RBNZ FAQs

What is the Reserve Bank of New Zealand?

The Reserve Bank of New Zealand (RBNZ) is the country’s central bank. Its economic objectives are achieving and maintaining price stability – achieved when inflation, measured by the Consumer Price Index (CPI), falls within the band of between 1% and 3% – and supporting maximum sustainable employment.

How does the Reserve Bank of New Zealand’s monetary policy influence the New Zealand Dollar?

The Reserve Bank of New Zealand’s (RBNZ) Monetary Policy Committee (MPC) decides the appropriate level of the Official Cash Rate (OCR) according to its objectives. When inflation is above target, the bank will attempt to tame it by raising its key OCR, making it more expensive for households and businesses to borrow money and thus cooling the economy. Higher interest rates are generally positive for the New Zealand Dollar (NZD) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken NZD.

Why does the Reserve Bank of New Zealand care about employment?

Employment is important for the Reserve Bank of New Zealand (RBNZ) because a tight labor market can fuel inflation. The RBNZ’s goal of “maximum sustainable employment” is defined as the highest use of labor resources that can be sustained over time without creating an acceleration in inflation. “When employment is at its maximum sustainable level, there will be low and stable inflation. However, if employment is above the maximum sustainable level for too long, it will eventually cause prices to rise more and more quickly, requiring the MPC to raise interest rates to keep inflation under control,” the bank says.

What is Quantitative Easing (QE)?

In extreme situations, the Reserve Bank of New Zealand (RBNZ) can enact a monetary policy tool called Quantitative Easing. QE is the process by which the RBNZ prints local currency and uses it to buy assets – usually government or corporate bonds – from banks and other financial institutions with the aim to increase the domestic money supply and spur economic activity. QE usually results in a weaker New Zealand Dollar (NZD). QE is a last resort when simply lowering interest rates is unlikely to achieve the objectives of the central bank. The RBNZ used it during the Covid-19 pandemic.