• NZD/USD gains ground to around 0.6055 in Wednesday’s early Asian session.
  • Investors brace for the outcome of US-China trade talks. 
  • Deepening deflation risk in China could weigh on the New Zealand Dollar. 

The NZD/USD pair trades in positive territory near 0.6055 during the early Asian session on Wednesday. Hopes that trade talks between the United States (US) and China were going well provide some support to the China-proxy New Zealand Dollar (NZD). The US Consumer Price Index (CPI) inflation data for May will take center stage later on Wednesday. 

Investors await the outcome of trade policy talks between the US and China, the world’s two largest economies. US Commerce Secretary Howard Lutnick said that the US and China have reached a framework to implement the Geneva Consensus, but they will go back and see if US President Donald Trump approves it

Trump commented earlier this week that China is “not easy,” but the US is “doing well” in the negotiations. Optimism surrounding US-China negotiations underpins the China-proxy Kiwi, as China is a major trading partner of New Zealand.

Traders will take more cues from the US CPI inflation report on Wednesday. The headline CPI is expected to see an increase of 2.5% YoY in May, while the core CPI is estimated to see a rise of 2.9% YoY in the same period. This report could offer some hints about further insight into the US economy. 

“Ultimately this report is not expected to cause any significant changes to the Fed’s current wait-and-see approach when it comes to setting rates,” said Sam Millette, director of fixed income at Commonwealth Financial Network. 

China's producer deflation deepened to its worst level in 22 months, while consumer prices extended their decline, weighing on the NZD. China’s CPI dropped at an annual pace of 0.1% in May after declining 0.1% in April, the National Bureau of Statistics of China reported on Monday. The market consensus was for a 0.2% decrease in the reported period. Meanwhile, PPI fell 3.3% YoY in May, following a 2.7% decline in April. The data came in lower than the market consensus of 3.2%.  

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.

Source: Fxstreet