NZD leads G10 as Dollar weakness and China data boost sentiment

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• NZD was the strongest G10 currency last week, supported by USD weakness, improved global risk sentiment, and stronger-than-expected Chinese PMI data
• Markets expect the RBNZ to cut rates by 25 bp on October 8, though some investors are pricing in a deeper 50 bp move after weak Q2 GDP (-0.9%) and declining PMI readings
• NZD/USD rebounded to 0.582–0.584 after a weak Q3

This week, the New Zealand dollar was the strongest currency among the G10 against the US dollar. This move was not accidental – NZD benefited from the broad weakness of the USD, improved investor sentiment on global markets, and positive signals from both the domestic economy and China, New Zealand’s key trading partner.

NZDUSD, daily interval, source: TradingView

Labor Data in US Weakens Dollar

The main driver for developed market currencies was the shift in expectations regarding the Federal Reserve’s monetary policy. More and more investors expect that the Fed will cut interest rates for the second time in a row in October. These expectations were reinforced by weaker ADP labor market data and uncertainty linked to the partial government shutdown in the US. Due to the administrative paralysis, the September nonfarm payrolls report has not been published yet. The prospect of a softer monetary policy created strong downward pressure on the US dollar, opening the way for other currencies, including NZD, to rebound.

Additionally, optimism in the stock markets, with US indices hitting new record highs, boosted risk appetite. This environment traditionally favors commodity-linked currencies such as the New Zealand dollar.

Stronger Chinese Economy and Local Stabilization

NZD also gained support from stronger-than-expected data in China. September’s Caixin PMI indexes beat expectations – manufacturing rose to 51.2 points and services to 52.9 points. For New Zealand, whose economy heavily relies on exports to China, this was particularly positive news.

Domestically, the ANZ Business Outlook survey showed the highest level of business activity expectations in five months, while consumer sentiment also improved. Although the outlook for another RBNZ rate cut still weighs on the medium-term potential of the currency, short-term local data helped reduce pessimism toward NZD.

RBNZ Ahead of Key Decision

The Reserve Bank of New Zealand will meet on October 8, with the market consensus pointing to a 25 bp rate cut to 2.75%. There is also the possibility of a deeper cut – around 32 bp – as two members previously voted for a 50 bp reduction in August.

Implied Overnight Rate & Number of Hikes/Cuts, source: Bloomberg

Arguments for a Cut

Recent data confirm that the New Zealand economy is weakening. GDP in Q2 fell by 0.9%, much worse than expected (-0.2%) and than the central bank’s own forecast (-0.3%). The largest declines were seen in manufacturing (-3.5%), construction (-1.8%), and exports (-1.2%). PMI data also signal contraction – manufacturing at 49.9 points and services dropping sharply to 47.5 points.

New Zealand GDP Growth Rate, source: Trading Economics

Key Data Ahead

Upcoming releases will be crucial for further policy decisions: Q3 inflation (October 19) and employment data (November 4). Forecasts suggest inflation will remain close to RBNZ expectations – 2.9% y/y in Q3 and 2.8% in Q4.

From December 1, Anna Breman, currently Deputy Governor of the Riksbank and considered dovish, will take over as Governor of the RBNZ. Markets are already partially pricing in the possibility of a softer policy stance under her leadership.

NZD Outlook

After a weak third quarter, when it lost nearly 5% against the USD, the New Zealand dollar has regained ground. NZD/USD ended the week around 0.582–0.584, marking its fifth consecutive session of gains.

Short-term pressure may return if some RBNZ members push again for a 50 bp cut. However, there is a good chance that NZD/USD will reach the 0.60 level in the coming months – driven not only by US dollar weakness but also by expectations of improved global investor sentiment.

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