NZD/USD drops to one-week low after weaker Chinese PMI, eyes 0.5900 on modest USD uptick

• NZD/USD edges lower on Tuesday following the disappointing release of Chinese PMI.
• A modest USD uptick further contributes to the mildly offered tone surrounding the pair.
• Hopes for more stimulus from China might lend some support to the risk-sensitive Kiwi.

The NZD/USD pair attracts fresh sellers during the Asian session on Tuesday and drops to a one-week low, around the 0.5920-0.5915 region in reaction to the disappointing Chinese data.

In fact, a private survey showed that business activity in China's services sector expanded for an eighth straight month in August, albeit at the slowest pace in eight months. The Caixin/S&P Global Services PMI dropped from 54.1 in July to 51.8 last month, marking the lowest reading since December 2022. The report revives concerns about the worsening economic conditions in the world's second-largest economy, which, in turn, is seen as weighing on antipodean currencies, including the New Zealand Dollar (NZD).

Apart from this, the emergence of some US Dollar (USD) buying turns out to be another factor exerting some downward pressure on the NZD/USD pair. That said, growing acceptance that the Federal Reserve (Fed) is nearing the end of its rate-hiking cycle might hold back the USD bulls from placing aggressive bets and help limit the downside for the major. Investors now seem convinced that the Fed will leave its interest rates unchanged at the September policy meeting and the bets were reaffirmed by Friday's mixed jobs data.

This, along with the latest optimism over more stimulus measures from China, which remains supportive of a generally positive tone around the equity markets, could act as a tailwind for the risk-sensitive Kiwi. The NZD/USD could further draw support from the fact that S&P Global Ratings downplayed the possibility of a credit rating downgrade remains for New Zealand, despite some challenges with the fiscal deficit and the current account deficit. This, in turn, warrants some caution for aggressive bearish traders.

Technical levels to watch