NZD/USD maintains position above 0.5650 ahead of US ISM Services PMI

NZD/USD rises as the US Dollar corrects downwards ahead of ISM Services PMI due later in the day.
President-elect Donald Trump stated that his tariff policy will not be scaled back.
The New Zealand Dollar received support from the improved China’s Services PMI in December.

NZD/USD extends its winning streak, trading around 0.5670 during the early European hours on Tuesday. Traders will likely observe the US ISM Services Purchasing Managers Index (PMI) scheduled to be released later in the North American session. On Wednesday, markets will focus on the Minutes from the Federal Reserve's (Fed) December policy meeting.

On Monday, the seasonally adjusted S&P Global US Services PMI Business Activity Index climbed for the second consecutive month in December, reaching a 33-month high of 56.8, up from 56.1 in November. Meanwhile, the S&P Global US Composite PMI Output Index rose to 55.4 in December, compared to 54.9 in November. This latest reading indicated a significant monthly increase in business activity, marking the fastest expansion since April 2022.

The overall growth in activity was primarily driven by robust performance in the service sector, even as manufacturing production experienced a further decline. This resilience in services may have helped cushion potential downside pressure on the US Dollar.

Additionally, the upside of the NZD/USD pair could be limited as the US Dollar (USD) may find some support following President-elect Donald Trump's comments that his tariff policy will not be scaled back. Trump also refuted a Washington Post report suggesting his team was considering limiting the scope of his tariff plan to only cover specific critical imports. Traders are expected to closely watch developments related to Trump's tariff strategy.

The New Zealand Dollar (NZD) gained support from the improved Caixin Services PMI for China, its key trading partner. The index rose to 52.2 in December 2024, up from 51.5 in November, exceeding market expectations of 51.7. This marks the fastest growth in the services sector since May.

However, the growing likelihood of aggressive monetary easing by the Reserve Bank of New Zealand (RBNZ) could limit the upside potential of the Kiwi Dollar. The RBNZ is anticipated to reduce the current cash rate of 4.25% by 50 basis points during its February meeting.

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.

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