NZDUSD – A Signal For the RBNZ to Pause Monetary Tightening?

The financial market headlines always seem to be partially dominated by the surroundings inside Europe and the United States, but it is always important to be familiar with the Oceania region as well. The New Zealand Dollar fell to a two-month low against its US counterpart (0.8421) on Wednesday morning, following a mixed reaction to the latest New Zealand employment report.

I say mixed reaction, because the news that the New Zealand unemployment rate fell to its lowest level in over five years (5.6%) should be seen as highly positive. However, the 60 pip NZDUSD decline in the Kiwi was encouraged by the release expressing that seasonally adjusted employment only increased by 0.4% on the quarter, against expectations for a 0.7% rise. On an annualised basis, employment rose by 3.7% compared to a 4% expectation.

For those who may be slightly confused regarding why the report inspired NZDUSD selling, seasonally adjusted employment missing expectations could be used as a reason for the Reserve Bank of New Zealand (RBNZ) to pause monetary tightening. After becoming the first major Central Bank to turn hawkish since the global financial crisis emerged and raise interest rates, the RBNZ have hiked rates for the past four consecutive months. This encouraged investors to run towards the New Zealand Dollar, which was valued as low as 0.8050 on the 4th February but appreciated as high as 0.8831 on the 11th July.

Since then, the Kiwi has tumbled towards to around 0.8450. RBNZ Governor, Graeme Wheeler put the accelerator on downside NZDUSD movement when he heavily talked down the New Zealand Dollar following the latest RBNZ rate hike. Wheeler was explicit in expressing his opinion that the valuation of the New Zealand currency was unjustifiable and unsustainable. Additionally, he strongly hinted that after four consecutive rate rises, the Central Bank were set to pause further hikes.

Back in April, when the RBNZ threatened currency intervention to prevent an already elevating New Zealand Dollar appreciating any further, the Central Bank raised concerns that investors purchasing the New Zealand Dollar would contribute to worsening fundamental performances. Those concerns were validated when a host of economic releases missed expectations. This included a variety domestic economic releases, such as import and export data, alongside consumer confidence readings. Additionally, the latest New Zealand CPI (reading) disappointed with a 1.6% annualised gain, compared to a 1.8% market expectation.

To me, Wednesday morning’s mixed employment report is an indicator that corporations within New Zealand might now be feeling the pinch following higher borrowing rates. Business hiring slowing slightly might be a signal that capital expenditure could be set for a decline. This possible emergence is likely ample of a reason for the RBNZ to sit back and leave monetary policy unchanged for at least the remainder of the current quarter. This should also encourage the NZDUSD to make a gradual return back towards around the 0.83 level.

If this occurs and we encounter New Zealand economic releases returning to more consistent levels, we can expect talks regarding the possibility of further rate rises to resume towards the end of the year.

 

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Jameel Ahmad
About the Author
Jameel Ahmad is the Chief Market Analyst at Forex Time (FXTM). He holds a BA (Hons)degree in Business Studies with Accountancy & Finance from the University of the West of England, Bristol, UK. In his early career, Jameel worked on a variety of projects in the Middle East, Europe and United States, which allowed him to develop a detailed understanding of banking, international finance and asset management. Later on he worked as a strategic research analyst for an international brokerage firm, where he gained invaluable experience in writing FX commentaries and fundamental analysis on distinguished financial websites.

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