NZD/USD inches higher to near 0.6050, upside seems limited due to increased risk aversion

• NZD/USD may face challenges due to dovish sentiment surrounding the RBNZ’s policy outlook.
• New Zealand's monthly Trade Balance reported a deficit of $2.1 billion in September, against the previous deficit of 2.3 billion.
• The US Dollar gains support from increased risk aversion as concerns grow over a potential resurgence of inflation in the US.

NZD/USD recovers some of its recent losses, trading around 0.6040 during Tuesday's Asian session. However, the New Zealand Dollar (NZD) faces pressure as the likelihood of further rate cuts in November by the Reserve Bank of New Zealand (RBNZ) grows, with inflation easing and economic output remaining sluggish.

In September, New Zealand's monthly Trade Balance showed a deficit of $2.1 billion, with Exports increasing by $246 million (5.2%) to $5.0 billion, while Imports declined by $67 million (0.9%) to $7.1 billion.

The NZD may have found some support following China’s rate cuts on Monday. As New Zealand's largest trading partner, China’s decision to lower its 1-year Loan Prime Rate (LPR) to 3.10% from 3.35% and its 5-year LPR to 3.60% from 3.85% could stimulate domestic economic activity, potentially boosting demand for New Zealand exports.

The US Dollar (USD) gained support following a surge in US Treasury yields, which climbed over 2% on Monday. At the time of writing, the 2-year and 10-year US Treasury bond yields stand at 4.02% and 4.18%, respectively. This rise was fueled by signs of economic resilience and growing concerns about a potential resurgence of inflation in the United States, reinforcing expectations of tighter monetary policy.

Recent economic data dispelled the likelihood of a bumper rate cut by the Federal Reserve (Fed) in November. According to the CME FedWatch Tool, the likelihood of a 25-basis-point rate cut in November is 89.1%, with no expectation of a larger 50-basis-point cut.

Federal Reserve Bank of Minneapolis President Neel Kashkari highlighted on Monday that the Fed is closely monitoring the US labor market for signs of rapid destabilization. Kashkari cautioned investors to anticipate a gradual pace of rate cuts over the coming quarters, suggesting that any monetary easing will likely be moderate rather than aggressive.