New Zealand Dollar On Top Following Chinese and U.S. Data

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The New Zealand Dollar is the top-performing G10 currency in the midweek session thanks to a soft U.S. inflation data release and better-than-expected industrial and retail sales figures out of China.

Chinese industrial production rose 4.6% year-on-year in October, surpassing expectations for 4.4% and suggesting the outlook in New Zealand's key trade partner has improved.

Retail sales in China meanwhile jumped 7.6% in the year to October, far outstripping the consensus expectation for 7.0% and September's 5.5%. This is particularly supportive of the Kiwi Dollar as New Zealand's exports tend to be consumer-sensitive (whereas Australia's raw materials are particularly prone to China's industrial sector).

Authorities in China meanwhile announced fresh efforts to boost the economy, aiding sentiment towards China-linked assets, such as the NZ Dollar.

"Sentiment was bolstered by the decision by China’s central bank to inject liquidity into the banking system to support growth," says Hann-Ju Ho, an economist at Lloyds Bank.

The People's Bank of China ramped up liquidity injections but kept the interest rate unchanged when rolling over maturing medium-term policy loans on Wednesday, matching market expectations.

It said it was keeping the rate on 1.45 trillion yuan worth of one-year medium-term lending facility (MLF) loans to some financial institutions unchanged at 2.50% from the previous operation.

With 850 billion yuan worth of MLF loans set to expire this month, the operation results in a net 600 billion yuan of fresh fund injection into the banking system. "NZD trades very well, compared to other majors," says a note from Citibank. "China retail sales were solid... while PbOC liquidity injection helped."

Above: NZD outperformed all its peers in the G10 complex. Set up a daily rate alert email to track your exchange rate OR set an alert for when your ideal exchange rate is triggered ➡ find out more.

However, the biggest boost to the New Zealand Dollar was supplied by developments in the U.S., where it was reported Tuesday that inflation had fallen further, raising hopes the Federal Reserve would keep interest rates unchanged at upcoming meetings.

Asian and New Zealand equity indices rallied after the larger-than-expected slowdown in U.S. CPI inflation to 0% month-on-month in October from 0.5% in September, ensuring U.S. 10-year Treasury yields remained below 4.5%.

"U.S. CPI inflation data coming in weaker than expected, in terms of both the headline and core rates, dragged the USD sharply down across the board," says Roberto Mialich, FX Strategist at UniCredit Bank. "High-beta currencies, such as the AUD, the NZD and, to a lesser extent, the CAD also enjoyed a strong rally."

Investors have meanwhile brought forward the expected timing of a first U.S. Federal Reserve rate cut to mid-year 2024, which has the effect of lowering U.S. and global bond yields.

Bond yields are used to price a significant amount of loans, meaning the cost of money in the U.S. and across the world is easing even before the Federal Reserve and other central banks cut interest rates.

This is supportive of the global economic outlook, to which the New Zealand Dollar is highly sensitive.

"Financial markets expect the Fed to leave interest rates on hold in December and are pricing in the first cut potentially as early as May," Lloyds Bank's Hann-Ju Ho.