NZD/USD holds positive ground above 0.5700 as China’s deflation eases in September

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The NZD/USD pair gains ground near 0.5720 during the Asian trading hours on Wednesday. Nonetheless, softer-than-expected Chinese consumer prices and rising trade tensions between the United States and China might cap the upside for the China-proxy New Zealand Dollar (NZD).

NZD/USD strengthens to around 0.5720 in Wednesday’s Asian session.
China’s CPI dropped more than expected in September.
A prolonged US federal shutdown could weigh on the US Dollar and act as a tailwind for the pair.

Data released by the National Bureau of Statistics of China on Wednesday showed that China’s Consumer Price Index (CPI) declined 0.3% YoY in September, compared to -0.4% in August. This figure came in below the market consensus of -0.1%.

Meanwhile, Chinese CPI inflation rose 0.1% MoM in September versus 0% prior. The market consensus was for 0.2% in the reported period. The Producer Price Index (PPI) dropped 2.3% YoY in September, following a 2.9% fall in August, in line with the forecast. Softer inflation and persistent deflationary pressure in China could undermine the China-proxy Kiwi, as China is the largest trading partner for New Zealand.

Furthermore, fresh tensions in the relationship between the US and China, the world’s two largest economies, might also weigh on the NZD. Beijing vowed to retaliate after Washington threatened an additional 100% tariff on China last week.

On the other hand, the ongoing US government shutdown might drag the Greenback lower and create a tailwind for the cross. The Senate on Tuesday failed to reach the 60 votes needed to advance the House-passed bill to end the government shutdown and extend funding into next month, with no new Democrats offering their support.

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.