NZD/USD holds below 0.5700 on Trump’s tariff plans, dovish RBNZ bets

NZD/USD softens to near 0.5675 in Friday's early Asian session.
The RBNZ is expected to cut its Official Cash Rate by 50 bps in the February meeting.
Trump said he would demand that interest rates drop immediately.

The NZD/USD pair trades in negative territory around 0.5675 during the early Asian session on Friday. The New Zealand Dollar (NZD) struggles to gain ground amid the uncertainty surrounding tariff announcements on China by US President Donald Trump and the dovish stance of the Reserve Bank of New Zealand (RBNZ).

New Zealand's Consumer Price Index (CPI) inflation data for the fourth quarter of 2024 revealed that underlying inflation continues to soften, raising the bets that the RBNZ will deliver further rate cuts. Swaps markets are now pricing in nearly 90% possibility 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.

On the other hand, the downside for the pair might be limited after Trump’s remarks. Late Thursday, Trump said he wants the US Federal Reserve (Fed) to cut interest rates immediately. "With oil prices going down, I'll demand that interest rates drop immediately, and likewise they should be dropping all over the world," said Trump at the World Economic Forum in Davos, Switzerland.

Investors will closely monitor further clarity on Trump’s tariff policies as well as the US economic data. The flash US S&P Global Manufacturing and Services Purchasing Managers Index (PMI) for January will take center stage later on Friday. Additionally, the US Existing Home Sales and Michigan Consumer Sentiment Index data will be published.

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.