NZD/USD pulls back below 0.5800 as markets turn cautious

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NZD/USD hesitates at 0.5800 with investors cautious ahead of key US data.
US ADP employment on Wednesday and the Nonfarm Payrolls report might determine the USD's near-term path.
The Kiwi Dollar remains supported by RBNZ-Fed monetary policy divergence.

The New Zealand Dollar’s rebound from the 0.5740 area on Monday has failed to find follow-through above the 0.5800 level during Tuesday’s European session, and the pair pulled back to the 0.5790 area, heading into the US session opening.

The risk-on mood seen on Monday’s US trading session and Tuesday's Asian session has waned during the London session. Investors seem to have trimmed their US selling positions, bracing for a string of key US labour employment figures, which shed some light on the US Federal Reserve’s (Fed) rate cut path.

On Monday, the US Dollar (USD) retreated against most of its peers after the ISM Manufacturing PMI showed that the sector’s activity fell to 47.9 in December, from 48.2 in November, hitting its lowest level in the last 14 months.

Furthermore, Minneapolis Fed President Neel Kashkari leaned dovish, warning of the risk that the jobless rate could pop higher and endorsing markets’ view that the Fed would be forced to cut rates lower than forecast in 2026.

In New Zealand, the third quarter’s Gross Domestic Product (GDP) beat expectations in December, cementing hopes that the Reserve Bank of New Zealand (RBNZ) easing cycle ended last year. RBNZ Governor, Ann Breman, has confirmed those views, pointing to a steady monetary policy for an extended period.

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.