- The New Zealand Dollar extends its bearish trend across most pairs as widespread weakness in economic fundamentals puts pressure.
- RBNZ Governor Adrian Orr says the bank is “laser focused” on beating inflation.
- Technically, prices could be about to correct higher within a persistent downtrend.
The New Zealand Dollar (NZD) retreats against its most traded peers on Wednesday, following the trend of previous weeks, as bearish fundamentals, including the overall negative outlook for growth, continue to weigh.
Reserve Bank of New Zealand (RBNZ) Governor Adrian Orr's recent comments did not provide much support for the New Zealand Dollar, despite the prospect of the RBNZ maintaining relatively high interest rates. In a speech on Tuesday, Orr stressed the importance of fighting excessively high inflation.
Normally, higher interest rates help a currency by attracting more foreign capital inflows, but in New Zealand's case this does not appear to be the case. This is likely because high inflation is accompanied by weak growth after the economy fell into a technical recession in the fourth quarter of 2023.
New Zealand dollar in downward trend due to the weight of negative fundamentals
The New Zealand dollar is under pressure. The latest Statistics New Zealand figures showed the New Zealand economy contracted 0.1% in the fourth quarter of 2023 following a 0.3% contraction in the third quarter.
At the same time, headline inflation remained relatively high at 4.7% during the same period, although it slowed down from the 5.6% recorded in the third quarter.
Normally, weak growth would require lower interest rates. However, the Reserve Bank of New Zealand (RBNZ) cannot cut interest rates due to too high inflation. The high price growth is partly due to structural problems, such as the rigidity of the labor market, which in turn keeps wage inflation high.
In his speech on Tuesday, Governor Adrian Orr said the RBNZ remains “laser focused on controlling inflation”.
“We are now in a much happier space, where most central banks feel that we are back at the top of inflation, [pero estamos] It's not there yet,” he added.
Technical analysis: The New Zealand dollar could undergo a correction
NZD/USD is falling in the last wave C of a three-wave bearish pattern, known as Measured Movement. This type of pattern is made up of three waves, usually labeled ABC.
The end of wave C can be calculated because it is usually the same length or a Fibonacci ratio of 0.618 as wave A. According to this forecasting method, wave C still has some way to go before completing.
US Dollar vs. New Zealand Dollar: Daily Chart
Assuming the pattern develops as expected, NZD/USD is likely to fall to a target around 0.5847, corresponding to the end of wave C. It has already reached the conservative target measured using the Fibonacci ratio of 0.618 of wave A, at 0.5988.
However, the bearish outlook is complicated by the RSI (Relative Strength Index) momentum indicator, which briefly fell into oversold territory on Monday and then recovered on Tuesday. The entry and subsequent exit of oversold levels is a buy signal. He recommends short sellers close their bets and open long positions. It suggests the possibility of a correction.
Therefore, it is very possible that the NZD/USD pair will experience some rally before continuing lower in line with the dominant bearish trend, towards the target generated by the measured movement.
New Zealand Dollar FAQ
What factors determine the price of the New Zealand Dollar?
The New Zealand Dollar (NZD), also known as the Kiwi, is a well-known currency among investors. Its value is largely determined by the health of the New Zealand economy and the policy of the country's central bank. However, there are some peculiarities that can also cause the NZD to move. The evolution of the Chinese economy tends to move the Kiwi because China is New Zealand's largest trading partner. The bad news for the Chinese economy will likely translate into fewer New Zealand exports to the country, which will affect the economy and therefore its currency. Another factor moving the NZD is dairy product prices, as the dairy industry is New Zealand's main export. High dairy prices boost export earnings, contributing positively to the economy and therefore the NZD.
How do RBNZ decisions affect the New Zealand Dollar?
The Reserve Bank of New Zealand (RBNZ) aims to achieve and maintain an inflation rate of between 1% and 3% over the medium term, with the aim of keeping it close to the midpoint of 2%. To do this, the bank sets an appropriate level of interest rates. When inflation is too high, the RBNZ raises interest rates to cool the economy, but the move will also drive up bond yields, making investors more attractive to invest in the country and thus boosting the NZD. On the contrary, lower interest rates tend to weaken the NZD. The so-called rate differential, or what rates in New Zealand are or are expected to be compared to those set by the US Federal Reserve, can also play a key role in the movement of the NZD/USD pair.
How does economic data influence the value of the New Zealand Dollar?
The release of macroeconomic data in New Zealand is key to assessing the state of the economy and can influence the valuation of the New Zealand Dollar (NZD). A strong economy, based on high economic growth, low unemployment and high confidence is good for the NZD. High economic growth attracts foreign investment and may encourage the Reserve Bank of New Zealand to raise interest rates if this economic strength is accompanied by high inflation. Conversely, if economic data is weak, the NZD is likely to depreciate.
How does overall risk sentiment affect the New Zealand Dollar?
The New Zealand Dollar (NZD) tends to strengthen during periods of risk appetite, or when investors perceive overall market risks to be low and are optimistic about growth. This usually translates into a more favorable outlook for commodities and so-called “commodity currencies” such as the kiwi. Conversely, the NZD tends to weaken during times of market turmoil or economic uncertainty, as investors tend to sell riskier assets and flee to more stable havens.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
