New Zealand dollar strengthens on bullish Chinese PMI; breaks a two-day streak of declines to USD

The NZD/USD pair is gaining some positive traction following a better-than-expected release of China’s Services PMI and climbing to around 0.5935 during Wednesday’s Asian session. For now, spot prices appear to have ended a two-day losing streak, although upside potential appears constrained amid continued geopolitical uncertainty.

The latest data released by RatingDog showed China’s services PMI rose to 54.4 in May from 52.6 the previous month, well above the consensus reading of 52.3. This also marks the fastest pace of expansion in three months, which in turn provides moderate growth for antipodean currencies, including the kiwi. Additionally, the sudden hawkish move by the Reserve Bank of New Zealand (RBNZ) and pent-up demand for the US dollar (USD) provide some support to the NZD/USD pair.

In fact, the RBNZ forecast strongly predicts a 25 basis point (bps) rate escalate at its upcoming July 8 meeting and indicates that OCR could reach around 2.85% by the end of this year, meaning a maximum of three rate increases. By contrast, investors are currently pricing in just over a 50% chance that the U.S. Federal Reserve (Fed) will raise borrowing costs once by the end of this year. This, combined with mixed signals from the US-Iran peace talks, is weakening the dollar and contributing to intraday gains in the NZD/USD pair.

In the latest developments in the crisis in the Middle East, ABC News reported on Tuesday that US forces carried out self-defense strikes on Iran’s Qeshm Island and intercepted a series of Iranian missile and drone attacks on regional neighbors. Adding to this, US Secretary of State Marco Rubio said that Washington would not lift sanctions on Iran in exchange for a full reopening of the Strait of Hormuz, adding that any easing of sanctions was contingent on Iran giving up its enriched uranium.

Meanwhile, US President Donald Trump announced an indefinite extension of the ceasefire and a continuation of the US blockade until negotiations are concluded one way or another. This keeps the geopolitical risk premium in play, which could continue to act as a tailwind for the USD and limit the NZD/USD position. Traders are now eagerly awaiting the release of the US ADP Private Sector Employment Report and the ISM Services PMI, which will provide momentum later in the North American session.

Economic indicator

PMI Service Rating

RatingDog Procurement Managers’ Index (PMI), published monthly by Caixin Insight Group and S&P Globalis a leading indicator measuring economic activity in China’s service sector. The data comes from surveys of senior executives in both private sector companies and state-owned enterprises. Survey responses reflect possible changes in the current month compared to the previous month and can predict changing trends in official data series such as gross domestic product (GDP), industrial production, employment and inflation. The index ranges from 0 to 100, and a level of 50.0 means no change compared to the previous month. A reading above 50 indicates that the service economy is expanding overall, which is a bullish signal for the renminbi (CNY). Meanwhile, a reading below 50 signals that activity among service providers is generally degenerating, which is seen as bearish for CNY.