New Zealand Dollar struggles to rebound despite softer US data

• NZD/USD declines on Tuesday as the US Dollar holds onto modest gains.
• US manufacturing activity loses momentum in August, while job openings come in slightly below expectations.
• Investors now turn their attention to the Reserve Bank of New Zealand’s monetary policy decision on Wednesday.

NZD/USD trades around 0.5900 on Tuesday at the time of writing, down 0.24% on the day. The New Zealand Dollar (NZD) remains under pressure against the US Dollar (USD), which holds onto modest gains despite the release of mixed United States (US) economic data.

The Institute for Supply Management (ISM) Manufacturing Purchasing Managers Index (PMI) falls to 54.6 in August from 55.6 in July, below the market consensus of 55.2. The indicator nevertheless remains well above the 50 threshold, signaling that US manufacturing activity continues to expand, albeit at a slower pace.

Looking at the details, the Employment Index declines to 51.2 from 52.8 previously, while the New Orders Index eases to 53.7 from 56.7 in July. Meanwhile, the Prices Paid Index remains unchanged at 71.1, indicating that price pressures remain elevated.

Labor market data also provide a mixed signal. The Bureau of Labor Statistics (BLS) reports that job openings, as measured by the Job Openings and Labor Turnover Survey (JOLTS), rise to 7.271M in July from 7.182M in June but remain slightly below the 7.3M expected. Hires and total separations are little changed at 5.1M.

The releases fail to trigger a significant reversal in the US Dollar. The US Dollar Index (DXY), which tracks the value of the Greenback against a basket of six major currencies, posts gains around 99.65 on Tuesday. The resilience of the Greenback therefore keeps NZD/USD under pressure despite the slightly weaker-than-expected US figures.

Investors’ attention now shifts to the Reserve Bank of New Zealand (RBNZ), which is due to announce its monetary policy decision on Wednesday. New Zealand’s interest-rate outlook could become the main near-term catalyst for the New Zealand Dollar, while markets also assess the implications of the latest US economic data for the Federal Reserve’s (Fed) monetary policy path.

NZD outlook softens as RBNZ risks underwhelming hawkish expectations

Analysts at ING expect the RBNZ to deliver a widely anticipated 25bp hike to 2.75% at tomorrow’s meeting, noting that “consensus is unanimous and markets are fully pricing in the move.” With the rate increase itself unlikely to surprise, ING argues that the reaction in the New Zealand Dollar will hinge on “whether the statement will still include firmly hawkish guidance, and on updated rate/economic projections.”

ING highlights “some downside risks for NZD,” pointing out that current market pricing of “95bp by June 2027 looks way too hawkish.” To justify that path, they say “the Reserve Bank would need to revise rate projections materially higher, as they currently embed only another 25bp hike for the next three quarters.” However, ING adds, “we don’t think they will, as we instead expect CPI projections to be revised lower on the back of softer oil prices.”

Against that backdrop, ING sees scope for renewed currency weakness, stating that “we see NZD/USD trading back below 0.590 in the near term as the RBNZ may fail to meet hawkish expectations and USD finds some support.”