NZD/USD tests the 21 DMA below 0.6450

• NZD/USD has pulled back below 0.6400 after testing its 21 DMA at 0.6430, but is still trading higher on the day.
• The weakness of the US dollar after the manufacturing data from the Philadelphia Federal Reserve and the strength of the kiwi after the good revisions of the PPI and OBEGAL are helping.

The NZD/USD rallied to test its 21-day moving average around 0.6430 on Thursday and approached two-week highs as the Kiwi rode a wave of US dollar weakness. The dollar came under downward pressure following the weak Philadelphia Fed manufacturing survey in May, which raised new fears about the weakness of the US economy, after the first quarter results of the main US retailers ., published earlier this month, will spark concerns about the health of the American consumer. At current levels of 0.6380, NZD/USD has trimmed its gains for the day to around 1.5%, with the pair trading around 2.5% above last week’s lows near 0.6200.

The kiwi has been supported by the huge increase in the pace of producer price inflation (PPI) on a quarter-on-quarter basis, according to a report released during the Asian session on Thursday. Production input prices rose 3.6% in the first quarter, while output prices rose 2.6%, and this latest increase in price pressures is seen by market participants as reinforcing the case for a second successive rate hike by the RBNZ next week (rates expected to rise to 2.0%).

“The RBNZ has accepted the logic that stronger action at the outset will reduce the need for an even more painful rate spike later on,” analysts at Westpac said. “We have recently updated our forecasts to include four consecutive 50 basis point hikes in the (official cash rate), in the May, July and August revisions, in addition to the April one.” This timing of rate hikes should see the RBNZ maintain its considerable lead over the Fed when it comes to monetary tightening, although this policy divergence has offered little long-term support to NZD/USD in recent weeks. The pair is still trading 9.0% below its early April highs above 0.7000.

On the other hand, New Zealand’s latest budget announcement, which contained NZ$1 billion in donations to low- and middle-income households to help tackle rising inflation, may have also supported the kiwi. Importantly, New Zealand has positively revised its operating balance before profit and loss (OBEGAL) forecasts and now sees itself in budget surplus for 2024/25, and Finance Minister Grant Robertson expects the economy to remain strong in the short term.

Technical levels