New Zealand Dollar Struggles on China Property News and Deteriorating Sentiment

Above: China is the premier destination for New Zealand timber exports. Image: Adobe Images.

Poor investor sentiment linked to the Chinese economy and surging global bond yields is weighing on the New Zealand Dollar.

The Kiwi was at the bottom of the G10 performance pile alongside the Aussie after Chinese house price data disappointed and served as a reminder that the world's number-two economy continues to struggle. Losses extended through the European session as investors fretted about rising bond yields that threatened to undermine global growth, but how the day ends for the New Zealand currency could well depend on the contents of a speech from the Federal Reserve's Chair Jerome Powell.

Risks to China's housing sector are a primary focus for the New Zealand Dollar amidst news that Chinese home prices fell at the fastest pace in almost a year in September.

The figures point to ongoing subdued consumer sentiment in China, which investors bet will potentially weigh on demand for New Zealand's consumer-dependent exports.

Prices for new homes, excluding state-subsidised housing, declined 0.3% in September, adding to the slippage of 0.29% recorded in August.

The house price declines come after China's biggest private property developer, Country Garden, looked set to default on its overseas debt.

A looming default adds to concerns about China's post-pandemic recovery and will weigh on Chinese proxies, such as the New Zealand and Australian Dollars.

New Zealand's agricultural exports - in particular milk and timber - are particularly prone to consumer sentiment in China.

According to an analysis from Bloomberg, household worries about developers lacking cash to complete properties are one reason sales are falling. Falling prices are proving to be a deterrent to homebuyers in a country where property has long been one of the main stores of wealth.

Yet it was just yesterday that the NZ Dollar was advancing on news China's economy posted a set of stronger-than-forecast economic growth and industrial production figures, raising hopes an uptick in activity was possible into year-end.

These developments concerning the property sector serve as a reminder that although the bottom for sentiment might be in, a solid rebound is unlikely.

This can keep the NZD's rebound potential in check.

Pressure on stocks and risk-linked assets such as NZD extended into the European trading session with sentiment struggling amidst an ongoing surge in U.S. bond yields as investors prepare for the U.S. Federal Reserve to maintain interest rates at elevated levels for an extended period.

"Stock markets fell deeper into the red on Thursday after widespread losses yesterday on the back of the tense mood in the Middle East that has fanned the rally in crude oil, which in turn is pushing up soaring bond yields even higher," says Raffi Boyadjian, Lead Investment Analyst at XM.com.

The U.S. ten-year yield - the benchmark to watch - reached fresh cycle highs at 4.967%.

Markets now turn to a 17:00 BST speech from the Federal Reserve's Jerome Powell, and the NZD could come under pressure if he doubles down on a message that U.S. interest rates will stay higher for longer.

"We expect Powell to reiterate the FOMC view that another hike in the Funds rate this year is more likely than not. A reiteration of the 'higher for longer' message on interest rates may allow U.S. yields to stay at or above their current levels and keep the USD supported," says Kristina Clifton, a currency strategist at Commonwealth Bank.

Nevertheless, the rise in yields could prompt Powell into a more circumspect mood that might disappoint some USD bulls. Indeed, rising yields imply tightening financial conditions that aid the Fed's already-delivered interest rate hikes in cooling economic activity and inflation.

Should Powell reference these developments, the market might pare back expectations for a November rate hike, potentially offering the likes of the New Zealand Dollar some relief.