- The New Zealand Dollar weakens on its most traded fronts following weak consumer confidence data.
- The New Zealand economy suffers from the double evil of high inflation and weak growth, further weighing on the NZD.
- The NZD/USD chart shows an ongoing bearish pattern with new lows likely on the radar.
The New Zealand Dollar (NZD) is weakening broadly on Thursday, after a leading indicator of consumer confidence in New Zealand deteriorated sharply in February.
The currency is further hurt by an economy that suffers from the double evil of high inflation and low growth, leaving the central bank with little room for maneuver.
New Zealand dollar undermined by weak Roy Morgan
The New Zealand dollar has depreciated following a sharp drop in the Roy Morgan consumer confidence indicator, a leading index that measures the “level of consumer confidence in economic activity.”
Data released overnight showed the index fell to 86.4 in February from 94.5 in January, the lowest level since July 2023, according to ANZ Bank.
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Roy Morgan Consumer Confidence: Monthly
New Zealand fell into a technical recession in the fourth quarter of 2023, after two quarters of negative economic growth.
Inflation, as measured by the Consumer Price Index, remains relatively high, at 4.7% in Q4, after falling from 5.6% in the third quarter. The largest contributor was Housing and Public Housing Services, which recorded an increase of 4.8% and represents the majority of the basket.
Poor economic data suggests the Reserve Bank of New Zealand (RBNZ) is caught: it must keep interest rates high, at 5.5%, to reduce inflation, but would probably prefer to lower them to stimulate growth. This is probably another factor weighing on the New Zealand dollar.
The structural problem of a tight labor market due to insufficient workers limits growth and keeps wages relatively high.
Technical Analysis: New Zealand Dollar in Bearish Trend Against USD
The price of NZD/USD, which measures the purchasing power of one New Zealand Dollar in terms of the United States Dollar (USD), is falling in a three-wave bearish pattern, known as a measured move.
The pattern consists of three waves, usually labeled ABC, in which waves A and C are normally of the same length.
US Dollar vs. New Zealand Dollar: 4-hour chart
Assuming the pattern develops as expected, the pair is likely to continue its decline until reaching the target at the end of wave C, located at 0.5847.
NZD/USD has already broken below the pattern's conservative target at 0.5988, measured as wave C ending at the 0.618 Fib ratio of wave A length.
The pair is in a short-term downtrend which, in keeping with the adage that “the trend is your friend”, is likely to continue.
The Relative Strength Index (RSI) is slightly converging with the price, which is a slightly bullish indicator. Convergence occurs when the price falls to lower lows, but the RSI does not reflect this. In the case of NZD/USD, the RSI is not as low as it was on March 19 even though the price is.
This could indicate the possibility of an upward correction, although the dominant downtrend would still be expected to resume once the correction ends.
RBNZ FAQ
What is the Reserve Bank of New Zealand?
The Reserve Bank of New Zealand (RBNZ) is the country's central bank. Its economic objectives are to achieve and maintain price stability – achieved when inflation, as measured by the Consumer Price Index (CPI), falls within the range between 1% and 3% – and to support maximum sustainable employment.
How does the Reserve Bank of New Zealand's monetary policy influence the New Zealand Dollar?
The Monetary Policy Committee (MPC) of the Reserve Bank of New Zealand (RBNZ) decides the appropriate level of the Official Cash Rate (OCR) in accordance with its objectives. When inflation is above target, the bank will try to control it by raising its key OCR, making it more expensive for households and businesses to borrow money and thus cooling the economy. Higher interest rates are generally positive for the New Zealand Dollar (NZD) as they generate higher returns, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken the NZD.
Why does the Reserve Bank of New Zealand care about jobs?
Employment is important to the Reserve Bank of New Zealand (RBNZ) because a tight labor market can fuel inflation. The RBNZ's goal of “maximum sustainable employment” is defined as the highest use of labor resources that can be sustained over time without creating an acceleration of inflation. “When employment is at its maximum sustainable level, there will be low and stable inflation. However, if employment is above the maximum sustainable level for too long, it will eventually cause prices to rise increasingly rapidly, requiring the MPC to raise interest rates to keep inflation under control,” the bank says. central.
What is quantitative easing (QE)?
In extreme situations, the Reserve Bank of New Zealand (RBNZ) may implement a monetary policy tool called Quantitative Easing. QE is the process by which the RBNZ prints local currency and uses it to purchase assets (usually government or corporate bonds) from banks and other financial institutions with the aim of increasing the domestic money supply and stimulating economic activity. QE generally results in a weaker New Zealand Dollar (NZD). QE is a last resort when simply lowering interest rates is unlikely to achieve the central bank's objectives. The RBNZ used it during the Covid-19 pandemic.
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.
