NZD/USD recovers above 0.5600 as PBOC reportedly signals rate cuts
- NZD/USD rebounds to near 0.5605 in Friday’s early European session, adding 0.26% on the day.
- PBoC signalled potential rate cuts this year, supporting the China-proxy Kiwi.
- Trump’s tariff threat and the cautious stance of the Fed might cap the pair’s upside.
The NZD/USD pair recovers some lost ground to around 0.5605 during the early European session on Friday. The prospect that the People's Bank of China (PBoC) will likely cut its main rate this year provides some support to the China-proxy New Zealand Dollar (NZD).
The Chinese central bank is reportedly planning to cut interest rates “at an appropriate time” this year, per the Financial Times. Additionally, the National Development and Reform Commission of the People's Republic of China (NDRC) noted that there is ample room for macro policies in 2025, adding that it’s fully confident in achieving continued economic recovery in 2025. The supportive measures from China boost the Kiwi, as China is a major trading partner for New Zealand.
On the other hand, US President-elect Donald Trump’s tariff threat could drag the Kiwi lower against the USD. In December, Trump promised new tariffs of 25% on all goods coming from Mexico and Canada and 10% on China. Analysts expect that it would hit an already weak Chinese economy, which would have spillover effects on New Zealand.
The expectation of fewer Federal Reserve (Fed) interest rate cuts in 2025 might underpin the Greenback and create a headwind for the pair. The Fed hinted that it will be more cautious in rate reductions as inflation remains stubbornly above its 2% target and the economy remains strong. The US central bank indicated that it probably would only lower twice more this year, according to the Summary of Economic Projections, or dot plot.
New Zealand Dollar FAQs
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.
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.
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.
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.