New Zealand dollar more stable but economic test looms
“Like Murder on the Orient Express, a plethora of headwinds are poised to thrust the knife in, with higher interest rates, continued cost pressures, slowing construction, weaker agricultural production and households more cautious in the framework”, – Nat Keall, ASB Bank .
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The New Zealand Dollar rebounded from the bottom of the bucket of major currencies in the last session of the week, but will face further challenges near and far in the coming days when GDP data from the Kiwifruit of the first quarter will be published close to the latest Federal Reserve (Fed) decision.
The New Zealand dollar was among the biggest losers in Thursday’s session as the euro tumbled against almost all counterpart currencies and stock markets sold off almost everywhere in a cacophony of losses.
The losses appear to be driven by a spike in US bond yields, the risk of further coronavirus containment measures in Shanghai and the market’s response to the European Central Bank’s (ECB) landmark monetary policy decision on Thursday.
But many currencies across the Asia-Pacific region, including the New Zealand dollar, showed greater resilience on Friday, even after stronger-than-expected US inflation data prompted the market to revise its assumptions. regarding Federal Reserve (Fed) interest rates.
“The word of the week was stagflation, with global markets worried about the risk of slowing global growth even as inflationary pressures remain high. Soaring oil prices have only added to these worries, with oil trading at around USD 120/barrel for the week (compared to USD 73/barrel at the start of the year),” says Sharon Zollner, Chief Economist at ANZ.
Above: NZD/USD displayed at hourly intervals alongside the S&P 500 index (blue), EUR/USD (black) and the Renminbi-Dollar rate (green). Click on the image for a closer inspection.
“But don’t expect downside risks to growth to deter global (and local) central banks from continuing to raise interest rates rapidly. Inflationary pressures are still far too strong – and many central banks are just beginning their campaigns to restore price stability,” Zollner added in a Friday note.
With the Australian and New Zealand dollars among the most resilient G10 currencies on Friday, downside risks to economic growth will be front and center for the Kiwi next week when Statistics New Zealand releases its first quarter GDP estimate on Wednesday. .
This is expected just hours after the Fed announced its June policy decision and economists will be poring over the data for clues as to how long the kiwi’s growth rates can sustain under the weight of multiple loads.
“Like Murder on the Orient Express, a plethora of headwinds are poised to thrust the knife in, with higher interest rates, continued cost pressures, slowing construction, weaker agricultural production and households more cautious in the framework,” says Nat Keall, an economist. at the ASB bank.
“None of these challenges are unique to New Zealand – the circumstances facing the global economy are difficult and there are no quick fixes. And that’s not to say the economy hasn’t no real strengths either – we are optimistic that New Zealand exports will hold up well thanks to high prices and resilient global demand. But growth will be slower in 2022 and 2023,” Keall said on Friday.
Above: NZD/USD displayed at daily intervals alongside the S&P 500 index (blue), EUR/USD (black) and the Renminbi-Dollar rate (green). Click on the image for a closer inspection.
Consensus estimates suggest the market will expect New Zealand’s growth rate to decline from 3% in the final months of 2021 to 0.5% in the first quarter, although Keall of ASB forecasts a growth rate of 0.6%.
Zollner and his colleagues at ANZ, on the other hand, have recently cut their forecast and are looking for zero growth in the final quarter in what could potentially prove to be a headwind for the New Zealand dollar next week.
Even more so if the Federal Reserve, soon after such a zero growth reading, attempts to outsmart an already hawkish market with its policy decision.
“Higher local interest rates are not providing any support for NZD, and on the contrary, they are exacerbating fears of a hard landing, which in turn are weighing on domestic NZD sentiment,” says David Croy, strategist at ANZ and colleague of Zollner. .
“The USD is making a comeback ahead of next week’s FOMC meeting, which is understandable given the heightened volatility. Our forecast calls for slight appreciation from here, but if a hard landing were to occur, our forecast would be compromised,” Croy also said on Friday.
Above: US Dollar Index displayed at weekly intervals with Fibonacci retracements, January and June 2021 uptrends indicating areas of medium to long-term technical support. Click on the image for a closer inspection.