In Thursday's Asian trading session, the NZD/USD pair fell to approximately 0.5740. The New Zealand Dollar (NZD) experienced a decline against the US Dollar (USD) due to revived concerns about a potential trade conflict between the United States and China. Key events for investors to watch later in the day include the weekly US Initial Jobless Claims report and commentary from Federal Reserve officials.
On Wednesday, US President Donald Trump signed two executive orders to enforce a 25% tariff on certain semiconductors and prepare for possible tariffs on essential minerals. The White House revealed that the US relies entirely on imports for 12 critical minerals and over 50% for 29 others. This dependency has given China leverage in US-China negotiations, given its significant role in the production and processing of these minerals. As China is a crucial trading partner for New Zealand, any negative developments in US-China relations could adversely affect the New Zealand Dollar, often seen as a proxy for Chinese economic performance.
Meanwhile, concerns over the Federal Reserve’s autonomy might impact the USD, potentially benefiting the NZD/USD pair. Fed Chair Jerome Powell criticized the Trump administration's decision to subpoena him, interpreting it as an attempt to pressure the central bank into adopting a looser monetary policy. Although Trump mentioned on Wednesday night that he has no current intentions to remove Powell from his position, he indicated it was premature to predict his future actions regarding the matter.
Factors Influencing the New Zealand Dollar
The New Zealand Dollar (NZD), commonly referred to as the Kiwi, is a popular currency among traders. Its valuation is primarily influenced by the state of New Zealand's economy and the policies of its central bank. However, specific unique factors also affect its movement. Given that China is New Zealand’s most significant trading partner, the performance of the Chinese economy has a substantial impact on the Kiwi. Economic downturns in China can lead to reduced exports from New Zealand, negatively affecting its economy and currency.
Another critical factor is dairy prices, as the dairy industry is New Zealand's leading export sector. Higher dairy prices can increase export revenues, positively affecting the economy and, consequently, the NZD.
Impact of the Reserve Bank of New Zealand (RBNZ)
The RBNZ aims to maintain an inflation rate between 1% and 3%, ideally around 2%. To achieve this, the bank adjusts interest rates accordingly. Elevated inflation might lead the RBNZ to raise interest rates to cool the economy, which can also make New Zealand bonds more attractive to investors, boosting the NZD. Conversely, lower interest rates may lead to a weaker NZD. The interest rate differential between New Zealand and the US can significantly influence the NZD/USD pair.
Role of Economic Data
Economic indicators from New Zealand are crucial in determining the NZD’s value. A robust economy characterized by high growth, low unemployment, and strong confidence typically strengthens the NZD. Such conditions may also prompt the RBNZ to increase interest rates, particularly if high growth is accompanied by inflation. On the other hand, weak economic data tends to depreciate the NZD.
Effect of Global Risk Sentiment
The NZD generally strengthens during periods of risk-on sentiment when investors feel optimistic about global growth and perceive lower market risks. This environment usually supports commodities and related currencies like the Kiwi. Conversely, during times of economic uncertainty or market volatility, the NZD tends to weaken as investors shift to safer assets.