NZD/USD dropped from around weekly highs in the North American session after US data painted a gloomy economic outlook but triggered demand for the US Dollar (USD) as risk aversion hit the FX space. US Treasury bond yields are down as investors price 75 bps of rate cuts by December 2023. The NZD/USD is trading at 0.6298, down more than 1%.

Risk aversion and a weaker Chinese economy weigh on NZD, down over 1%

A strong USD dented the prospects of the New Zealand Dollar (NZD), which weakened due to some reasons. Weaker inflation data in China prompted worries about the growth pace in one of Asia’s largest economies. Nevertheless, China’s contraction in factory activity, and imports falling, weighed on the NZD, which is seen as well as the Aussie Dollar (AUD) as a proxy for the Chinese economy.

On the USD front, data from the United States (US) showed that the labor market is easing, as unemployment claims climbed to 264K, above the 245K expected. At the same time, the Producer Price Index (PPI) in April decelerated to 2.3% YoY, the same as the core PPI, which rose by 3.2% YoY, with both figures below forecasts.

After the data release, the NZD/USD dived from around 0.6340s, toward the 0.6300 figure, before extending its losses late in the New York session. In the meantime, the US Dollar Index (DXY), a gauge that measures the buck’s value against six currencies, prints a new one-week high at around 102.153, up by 0.67%.

On the Fed speaker front, Minnesota’s Fed President Neil Kashkari held to his “hawkish” rhetoric, stating that inflation is coming down. Still, as it remains persistent, “We will have to keep at it for an extended period.”

Investors are also watching the discussions regarding the US debt ceiling, which did not progress as expected. US President Joe Biden would resume talks with US Congress leaders on Friday.

Upcoming events

The New Zealand economic docket will feature the Business Inflation Expectations for Q2, the Business PMI for April, and Visitor Arrivals. The US Trade of Balance and the University of Michigan Consumer Sentiment poll would be reported on the US agenda, alongside further Fed speaking.