NZD/USD softens to near 0.5600 on Trump tariff threat

NZD/USD edges lower to near 0.5600 in Tuesday’s early Asian session.
China is preparing countermeasures against fresh US import tariffs set to take effect on Tuesday.
US ISM Manufacturing PMI came in weaker than the expectation, falling to 50.3 in February vs. 50.9 prior.

The NZD/USD pair remains on the defensive around 0.5610 during the early Asian session on Tuesday. The New Zealand Dollar (NZD) weakens against the US Dollar (USD) amid concerns about an escalating trade war between the United States (US) and China, the world's top two economies.

China's state-backed Global Times reported early Tuesday that China’s Commerce Ministry vowed to take “necessary countermeasures” to safeguard China’s legitimate rights and interests. The ministry reiterated its firm opposition to the US move to impose another 10% tariff on Chinese imports starting on Tuesday. The escalating trade tensions exert some selling pressure on the China-proxy Kiwi as China is a major trading partner to New Zealand.

On the USD’s front, soft US economic data for the manufacturing sectors released Monday could undermine the Greenback and cap the downside for the pair. The US ISM Manufacturing Purchasing Managers' Index (PMI) declined to 50.3 in February versus 50.9 prior. This figure came in below the market consensus of 50.5.

Later on Tuesday, traders will take more cues from the Fedspeak. The Federal Reserve’s (Fed) Thomas Barkin and John William are set to speak. The attention will shift to Australia’s Gross Domestic Product (GDP) for the fourth quarter (Q4), which will be released on Wednesday.

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.