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22 Jan 2025
NZD/USD weakens to near 0.5650 as Trump threatens tariffs on China
- NZD/USD softens to around 0.5660 in Wednesday’s early Asian session, down 0.18% on the day.
- Trump’s tariff threats undermine the China-proxy Kiwi.
- The RBNZ will likely deliver a third jumbo rate cut at its February meeting.
The NZD/USD pair attracts some sellers to near 0.5660 during the early Asian session on Wednesday. The New Zealand Dollar (NZD) faces some selling pressure after US President Donald Trump said that he is discussing a 10% tariff on China on February 1.
Trump stated on Tuesday that his administration is discussing imposing a 10% tariff on goods imported from China on February 1 because fentanyl is being sent from China to Mexico and Canada, per Reuters. Investors will closely watch the developments surrounding US tariff policies, as China is a major trading partner to New Zealand.
New Zealand Consumer Price Index (CPI) inflation was slightly hotter than expected in December. Nonetheless, the overshoot doesn’t appear significant enough to dampen expectations for another jumbo rate cut from the Reserve Bank of New Zealand (RBNZ) in February.
Swaps markets are now pricing in a 90% chance of another 50 basis points (bps) reduction on February 19, adding to the two delivered earlier in the cycle. The RBNZ is expected to deliver a total of 100 bps of rate cuts for the remainder of 2025. The dovish stance of the RBNZ continues to weigh on the Kiwi against the US Dollar (USD).
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.