NZD/USD posts modest gains on softer US CPI inflation

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NZD/USD trades with mild gains around 0.5775 in Friday’s early Asian session.
US core CPI inflation fell to a four-year low in November.
The robust New Zealand Q3 GDP report boosts the Kiwi, but weaker-than-expected Chinese economic data might cap its upside.

The NZD/USD pair posts modest gains near 0.5775 during the early Asian session on Friday. The US Dollar (USD) softens against the New Zealand Dollar (NZD) as softer-than-expected US inflation data raises hopes for the US Federal Reserve (Fed) rate cut. Traders await the release of the University of Michigan Consumer Sentiment Index for December, which is due later on Friday.

Data released by the US Bureau of Labor Statistics (BLS) on Thursday revealed that the US Consumer Price Index (CPI) eased to 2.7% in November. This reading came in below the market consensus of 3.1%. Meanwhile, US core CPI, which excludes volatile food and energy prices, rose by 2.6%, missing the expectation of 3.0%. This figure marks the slowest pace since 2021.

This unexpected softness, which was announced after a delay due to the October government shutdown, fueled speculation that the US central bank might cut the interest rates sooner than previously expected. This, in turn, could exert some selling pressure on the Greenback and act as a tailwind for the pair.

New Zealand’s economy experienced a stronger-than-expected rebound in the third quarter (Q3), with the Gross Domestic Product (GDP) rising by 1.1%. This figure followed a revised 1.0% contraction in Q2. The upbeat New Zealand GDP report could underpin the Kiwi against the USD in the near term.

However, signs of weakness in the Chinese economy could weigh on the China-proxy New Zealand Dollar, as China is a major trading partner for New Zealand. Data released earlier this week showed that China’s Retail Sales rose 1.3% YoY in November, compared to 2.9% in October, according to the National Bureau of Statistics (NBS) on Monday. This figure came in weaker than the market expectation of 2.9%. The country’s Industrial Production climbed 4.8% YoY in the same period, versus 5.0% forecast and 4.9% prior.

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.