NZD/USD advances on positive market sentiment, systemic factors remain a drag

• The NZD/USD pair rises, continuing gains from Wednesday, when the Fed adopted an easing bias at its May policy meeting.
• Positive market sentiment drives NZD/USD gains on Thursday.
• Long-term negative factors and the worsening economic situation in New Zealand are likely to continue to weigh.

On Thursday, the NZD/USD pair rose eight hundredths to 0.5930 as improving global market sentiment favors commodity currencies, of which the New Zealand Dollar is a good example.

Risk appetite recovered thanks to the fall in oil prices, which reached their lowest level in seven weeks, around $79, and the positive results for the market from the monetary policy meeting of the Reserve US Federal (Fed) on Wednesday.

Lower oil prices reduce costs for businesses and ease overall inflation, and the conclusion of the Fed's May policy meeting was that, although US inflation was not falling fast enough to The central bank was seriously considering cutting interest rates, it was not considering raising them either. The Fed also decided to slow down the drawdown of its US Treasury bond holdings, effectively reducing the pace of quantitative tightening, a dovish move that weakened the US Dollar (USD) across most pairs.

However, despite the recovery in the last 48 hours, the NZD/USD pair is likely to remain under pressure in the long term, due to the poor performance of the New Zealand economy, which increases the chances that the Reserve Bank of New Zealand (RBNZ) cuts interest rates before the US Federal Reserve. As relatively low interest rates reduce capital inflows, this is likely to hurt the NZD more than the USD.

The streak of bad macroeconomic data in New Zealand continues

According to recent data from Statistics New Zealand, the New Zealand unemployment rate rose to 4.3% in the first quarter, its highest level in three years. New Zealand is in a technical recession after two quarters of negative growth. Additionally, headline inflation fell to 4.0% (3.7% core) in the first quarter, down from 4.7% previously. Although inflation remains well above the Reserve Bank of New Zealand's (RBNZ) target of 1.0% – 3.0%, pressure is mounting to lower interest rates to help boost the faltering economy.

According to analysts at Brown Brothers Harriman (BBH), building permits fell 0.2% in March in monthly terms and, what is worse, in annual terms the number of authorized homes fell 25.0%, suggesting that investment Residential will continue to be a drag on New Zealand growth.

Business confidence also fell to 14.9 in April, from 22.9 the previous month, marking the third consecutive month of decline and marking the lowest reading since last September, according to data released Tuesday.

According to Kelly Eckhold, chief economist at Westpac, the RBNZ appears to remain divided between those in favor of cutting rates and those in favor of raising them. While weak growth and high unemployment would be helped by lower interest rates, inflation is not seen as falling fast enough in key areas to justify lower interest rates.

“The persistence of core inflation is consistent with entrenched inflation expectations, implying that inflation could bottom out above 2% without further tightening. The balance of risks does not favor confidence in an OCR of 5.5%” , says the Chief Economist in her note “Hawks, Doves and Kiwis”, published on Wednesday.

For NZD/USD the key question is which central bank – the Fed or the RBNZ – will move first to cut interest rates. Given the worsening economic situation in New Zealand and the Fed's increasingly neutral stance, it seems more likely that the RBNZ will be the first to make the move.