Quick Look:
- RBNZ is on a path to hold OCR at 5.5% amidst recession and falling inflation.
- NZ is in a technical recession; the Q4 economy contracted by -0.3%.
- The US labour market is strong, but the Fed is cautious as no rate cuts are expected soon.
- The NZD/USD exchange rate is bearish, with analysts eyeing the 0.5940 target.
This week, the New Zealand Dollar (NZD) is under the microscope. On Wednesday, financial markets brace for the Reserve Bank of New Zealand’s (RBNZ) interest rate decision. Economists widely anticipate the central bank to maintain its Official Cash Rate (OCR) at 5.5%. It is a level that has not changed from the previous month, amidst New Zealand grappling with recessionary pressures and declining inflation rates.
RBNZ Tackles Inflation: Aiming for 2.0% Amid Recession
New Zealand’s inflation trajectory has shown signs of cooling. The Q4 2023 Consumer Price Index (CPI) dropped to 4.7% from 5.8% in Q3 2023. It is a notable decrease from the peak inflation rate of 7.3% in 2022. Besides, the RBNZ’s target inflation rate hovers around the 2.0% mark. Therefore, it faces a challenging environment marked by economic contraction. The latest data revealed a Q4 economic decline of -0.3%. Following a -0.6% contraction in Q3 – officially tipping the country into a technical recession.
In contrast, the United States has showcased resilience in its labour market. March’s nonfarm payrolls data revealed the addition of over 300,000 jobs, alongside climbing wage growth. However, the Federal Reserve’s stance appears cautious, with no immediate rate cuts anticipated in May and June, despite rising predictions for policy easing in the latter half of the year.
NZD/USD Volatility: From 0.6370 Peak to 0.5940 Low
The NZD/USD pair has experienced volatility, peaking at 0.6370 in January before sliding to a recent low of 0.5940. Currently positioned above the 0.6000 threshold, the exchange rate’s outlook remains bearishly tilted, with analysts eyeing an initial target of 0.5940 and a critical first support level at 0.5850.
The financial world will navigate through a week filled with pivotal reports and decisions. Including the US CPI report, the European Central Bank (ECB), and the Bank of Canada (BoC) interest rate decisions, alongside the RBNZ’s. These events are poised to inject significant volatility into the markets, with the US equity markets already rallying and the US 10-year yield breaching 4.40%.
NZD/USD Eyes Modest Gains Amid WTI Surge to $87
The NZD/USD pair’s weekly performance highlights a modest gain, closing near 0.6010, buoyed by a 3.5% weekly gain in the commodity index and WTI crude prices soaring over US$87/barrel. Market sentiment is cautious, with Federal Reserve officials delivering mixed signals regarding the US economic outlook and the pace of future rate adjustments.
The immediate future of the NZD/USD exchange rate seems perilously poised, with potential shifts influenced by the upcoming US CPI data and the RBNZ’s interest rate decision. Market analysts speculate a further dip below 0.5940 should the US CPI report come in hot, with a potential re-test of the 2023 low near 0.5770 on the horizon. Conversely, the RBNZ’s steadfast rate decision underscores its delicate balancing act amidst an intricate web of economic challenges.
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