New Zealand Dollar weakens ahead of Nonfarm Payrolls as US Dollar strengthens

Caution before US Nonfarm Payrolls weighs on NZD/USD.
Broader USD advances are capped by lower US bond yields, weaker oil prices and expectations of a Democratic sweep.
Weak domestic jobs figures and uncertainty ahead of the election maintain pressure on the New Zealand Dollar.

0.5560 is the approximate level for NZD/USD in Friday’s European session. The pair remains under pressure for a second consecutive day as widespread market caution supports the US Dollar (USD). Investors are focused on the forthcoming US Nonfarm Payrolls (NFP) report, expected to be pivotal in shaping expectations for the Federal Reserve’s December policy decision.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

A December Fed rate increase carries a probability of over 64%, according to current pricing on CME’s FedWatch tool. Lower US bond yields could nevertheless cap the Greenback’s upward momentum, with a Democratic sweep in the US elections contributing to the decline in yields. The political result has fuelled speculation that the Iran war could end, sending oil prices lower. It has also increased expectations of political gridlock in Washington, which could curb government spending and weaken economic growth.

Domestic economic weakness and political uncertainty are also weighing on the New Zealand Dollar (NZD). Statistics New Zealand reported earlier this week that unemployment reached 5.7% in the three months through September, its highest reading in nearly 11 years. That compares with 5.6% in the preceding quarter and a market forecast of 5.5%.

Saturday, 7 November brings New Zealand’s general election, adding another source of pressure on the NZD. The centre-right coalition led by Christopher Luxon’s National Party is under growing pressure to introduce policies that stimulate economic growth and ease cost-of-living pressures. Recent IPSOS polling highlights the importance of those measures: inflation and living costs rank as voters’ top concerns ahead of the vote.

US payrolls in focus after a volatile week

The latest US payroll release remains the market’s central focus. Commerzbank cautions that “anyone hoping for a quiet trading session on Friday after this eventful week is likely to be disappointed,” highlighting the figures’ significance for monetary policy. These numbers “are one of the most important pieces of economic data and usually provide an indication of the Fed’s future monetary policy,” the bank notes. Markets therefore remain alert to labour-market signals that could influence expectations for the next policy decisions.

New Zealand Dollar: key questions

New Zealand Dollar: the main drivers

Economic conditions in New Zealand and central bank policy are the main influences on the New Zealand Dollar (NZD), a widely recognised traded currency also called the Kiwi. Several more specific factors can also drive its movements. China is New Zealand’s largest trading partner, making the Kiwi sensitive to Chinese economic performance. Weak news from China is likely to imply reduced demand for New Zealand’s exports, hurting its economy and, in turn, its currency. Dairy prices are another important influence, as dairy products are New Zealand’s leading export. Higher prices raise export earnings, supporting both the economy and the NZD.

RBNZ policy and its effect on the New Zealand Dollar

A medium-term inflation range of 1% to 3%, centred on the 2% midpoint, is the objective of the Reserve Bank of New Zealand (RBNZ). The bank adjusts interest rates to meet that goal. Excessive inflation prompts the RBNZ to raise rates to slow the economy. Higher rates also lift bond yields, making investment in New Zealand more attractive and supporting the NZD. Rate cuts, by contrast, generally weaken the currency. NZD/USD can also be strongly influenced by the interest rate differential: the gap between current or expected New Zealand rates and those set by the US Federal Reserve.

Economic indicators and New Zealand Dollar valuations

New Zealand’s macroeconomic releases provide essential evidence of economic health and can affect the valuation of the New Zealand Dollar (NZD). Robust growth, low unemployment and strong confidence support the currency. Rapid economic expansion attracts overseas investment. If accompanied by high inflation, that strength may also prompt the Reserve Bank of New Zealand to raise interest rates. Weak economic readings, on the other hand, are likely to lead to NZD depreciation.

Risk sentiment and New Zealand Dollar performance

Risk-on conditions generally support the New Zealand Dollar (NZD). When investors view wider market risks as low and feel optimistic about growth, the outlook for commodities and so-called ‘commodity currencies’, including the Kiwi, tends to improve. Market turmoil or economic uncertainty usually has the opposite effect on the NZD, as investors sell higher-risk assets in favour of more stable safe havens.