The NZD/USD pair has recently gained momentum, trading around 0.6195 during the early Asian session on Friday. This surge is primarily driven by the weakening US Dollar amid growing speculation of a potential interest rate cut by the US Federal Reserve later this year. Additionally, positive economic data from China, New Zealand’s major trade partner, has further bolstered the New Zealand Dollar.

NZD/USD Gains Momentum Amid Fed Rate Cut Speculations

1. NZD/USD Strengthens in Asian Session

The NZD/USD pair is trading on a stronger note around 0.6195 during the early Asian session on Friday. This gain is primarily driven by the weakening US Dollar (USD) amid increasing speculation of an interest rate cut by the US Federal Reserve (Fed) later this year. Traders are closely watching the market, which may turn cautious ahead of the highly anticipated US Nonfarm Payrolls (NFP) data for May, set to be released later on Friday.

The NZD/USD pair’s resilience in the early Asian session is noteworthy. The pair’s performance is influenced by multiple factors, including global economic indicators and market sentiment. The weakening of the USD is a significant factor, driven by growing speculation that the Fed might cut interest rates. This speculation is not unfounded, as recent US economic data has been weaker than expected, leading to increased market anticipation of a rate cut.

2. Impact of Weaker US Economic Data

Softer Labor Market Data

The recent US economic data has been weaker than expected, spurring expectations of an interest rate cut from the Fed in September. Notably, the US weekly Initial Jobless Claims for the week ending May 31 increased by 8,000 to 229,000, up from the previous week’s 221,000. This figure exceeded the consensus estimate of 220,000. Additionally, the 4-week moving average of initial unemployment claims rose to 222,000 from 210,000 last month, reaching near the highest level in nine months.

The increase in jobless claims is a critical indicator of the labor market’s health. Higher jobless claims suggest that more people are filing for unemployment benefits, indicating potential weaknesses in the job market. This increase in claims, coupled with the rise in the 4-week moving average, points to a softening labor market, which could prompt the Fed to consider a rate cut to stimulate economic activity.

ADP Employment Report

On Wednesday, the US ADP Employment report showed a net addition of 152,000 jobs, which is a decline from the previous reading of 188,000. This softer labor market data further fuels the speculation of a Fed rate cut, putting pressure on the US Dollar and supporting the NZD/USD pair.

The ADP Employment report is a crucial indicator of private sector employment. A decline in job additions suggests that businesses are hiring fewer workers, which could be a sign of economic slowdown. This decline in job growth adds to the narrative of a weakening labor market, increasing the likelihood of a Fed rate cut. The pressure on the USD from these labor market indicators supports the NZD/USD pair, as a weaker USD makes the NZD more attractive to investors.

3. Market Expectations for Fed Rate Cut

Reuters Polls

According to Reuters polls conducted between May 31 and June 5, nearly two-thirds of economists now anticipate that the Fed will cut interest rates in September. This growing speculation is based on the recent weaker US economic data and labor market performance.

The Reuters polls reflect a significant shift in market expectations. The anticipation of a Fed rate cut is driven by the recent economic data, which suggests that the US economy may be slowing down. Economists’ expectations are influenced by various factors, including labor market indicators, inflation data, and overall economic growth. The consensus among economists that a rate cut is likely underscores the market’s concern about the US economy’s trajectory.

Upcoming US NFP Report

The US May NFP report, which is estimated to show 185,000 job additions in the US economy, will be closely watched. Softer-than-expected data could further fuel speculation of Fed rate cuts, potentially undermining the Greenback against the Kiwi.

The NFP report is one of the most closely watched economic indicators, as it provides a comprehensive view of the US labor market. Job additions are a key measure of economic health, and softer-than-expected data would reinforce the narrative of a weakening economy. If the NFP report shows fewer job additions than anticipated, it could increase the pressure on the Fed to cut rates, further weakening the USD and supporting the NZD/USD pair.

4. Support from Chinese Economic Data

China-Proxy NZD

The encouraging Chinese economic data lends additional support to the New Zealand Dollar (NZD), as China is a major trade partner for New Zealand. Data released by Caixin on Wednesday showed that China’s Services PMI improved to 54.0 in May, up from 52.5 in April. This figure exceeded market estimates of 52.6, providing a boost to the China-proxy NZD.

China’s economic performance has a significant impact on the NZD due to the strong trade relationship between New Zealand and China. The improvement in China’s Services PMI suggests that the Chinese economy is performing well, which is positive news for New Zealand’s export sector. The better-than-expected PMI data supports the NZD, as a strong Chinese economy boosts demand for New Zealand’s exports.

Impact on NZD/USD

The upbeat Chinese Services PMI data supports the NZD/USD pair, helping it to gain ground around 0.6195 in Friday’s Asian session. The positive economic indicators from China reinforce the strength of the New Zealand Dollar, contributing to its appreciation against the US Dollar.

The correlation between the NZD and Chinese economic data is well-established. Positive data from China often leads to gains in the NZD, as investors view the NZD as a proxy for Chinese economic performance. The improvement in China’s Services PMI is a positive signal for the NZD, supporting its gains against the USD. This dynamic is evident in the NZD/USD pair’s performance, as the pair strengthens on the back of positive Chinese data.

Summary

The NZD/USD pair’s recent strength is underpinned by a combination of weaker US economic data, growing speculation of a Fed rate cut, and positive Chinese economic indicators. These factors create a favorable environment for the NZD, supporting its gains against the USD. As the market awaits the NFP report, traders will be closely watching for any signs of further economic weakness in the US, which could increase the likelihood of a Fed rate cut and further support the NZD/USD pair. The dynamic interplay between US and Chinese economic data will continue to shape the pair’s performance, providing opportunities for traders to capitalize on market movements.