Latest economic report changes NZD value: The New Zealand dollar continues to rise against its US counterpart, as a result of a strong report from New Zealand that beat market expectations. Traders are adjusting their expectations, which is easing expectations of a rate cut by the Reserve Bank of New Zealand next week.
Economic data released on Wednesday showed that New Zealand’s unemployment rate rose to 4.6% in the second quarter, compared to 4.3% in the first quarter, but better than the 4.7% forecast. Additionally, the employment change rate rose by 0.4% in the second quarter, reversing a 0.2% decline in the previous quarter and beating market expectations of a 0.2% decline. These positive developments reduced the likelihood of a rate cut by the Reserve Bank of New Zealand, which contributed to the NZD rising against the US dollar.
The New Zealand dollar is expected to continue to benefit from positive data if the economy continues to show signs of recovery. However, investors should watch for any changes in monetary or economic policies that could impact the currency.
The rise in the New Zealand dollar on strong employment data is evidence of a stable and improving New Zealand economy. This boosts confidence in the currency and attracts more investment, supporting future economic growth.
Future Risk Warning: In the coming days, there will be certain factors that traders should watch carefully. This includes upcoming US economic data, including initial jobless claims. Furthermore, they will have special attention to the release of China’s July CPI on Friday to understand potential future market trends.
Reserve Bank of New Zealand and its Forward Guidance Adjustment
Potential Impact: A weaker-than-expected Chinese CPI reading or signs of an economic slowdown in China could have a direct impact on the New Zealand dollar. This is because the NZD/USD pair appears to be at risk of falling employment in New Zealand, especially based on the following factors:
Low Level and RSI: The NZD/USD pair surpassed the May low (0.5875), pushing the Relative Strength Index (RSI) into oversold territory for the first time in 2024. The exchange rate failed to defend the April low (0.5852) and recorded a new yearly low (0.5850)
Market Outlook: The NZD/USD pair could continue to recover from the 2023 low (0.5774), despite the Reserve Bank of New Zealand (RBNZ) warning that monetary policy should remain tight.
The central bank is set to keep the official cash rate (OCR) at 5.50% throughout 2024 amid signs of a slowing economy.
New Zealand Economic Calendar: New Zealand employment is forecast to contract by another 0.2% in Q2 2024, while the unemployment rate is expected to widen to 4.7% from 4.3% over the same period.
A bleak development could prompt the RBNZ to revise its forward guidance at its next meeting on August 14, and evidence of a weak labour market could weigh on the NZD/USD pair, putting pressure on the central bank to adopt a less restrictive policy stance. Meanwhile, a better-than-expected employment report could keep Governor Adrian Orr and company on the sidelines, and NZD/USD could attempt to recover from July’s high (0.6143) on fading speculation of a 2024 RBNZ rate cut.
Implications for the RBNZ
The NZD/USD pair may track the range from the first half of the year despite failing to defend the April low (0.5852), but the exchange rate may struggle to sustain the advance from the 2023 low (0.5774) if it struggles to push above the monthly high (0.5985).
The jobs report provided by me contains several important details about the New Zealand labor market. Here is a summary of the main points:
Unemployment and employment: The unemployment rate rose by 0.2% to 4.6%, the highest since December 2020. Employment growth was positive at 0.4% compared to expectations. Full-time employment fell by 0.1%, while the part-time workforce rose by 1.9%.
Unemployment rates: Labor force participation rose to 71.7%, reversing a negative trend since mid-2023. The underutilization rate rose at a faster pace than the unemployment rate, rising to 11.8%. Youth Impact: Youth unemployment rose sharply, reaching 20.7% among younger people.
Unemployment among young people aged 20-24 increased.
Wages: Private sector wages rose by a stronger-than-expected 0.9% during the quarter. Higher wages signal improved financial conditions for workers, a positive factor for the overall economic outlook.
Challenges and need for growth: Data suggests the economy is not growing at a sufficient rate to absorb new entrants into the labour market. There is an urgent need to accelerate growth to achieve greater levels of economic stability.
Implications for the Reserve Bank of New Zealand: New Zealand’s two-year interest rate rose by around 7 basis points on the back of the data, suggesting a slight reduction in the amount of easing expected from the RBNZ in the next rate cut cycle. Most mortgages in New Zealand are priced at two-year rates, making this a powerful tool when it comes to transmitting monetary policy.
Low and stable inflation
The Reserve Bank of New Zealand has a single policy mandate of low and stable inflation, rather than a dual mandate like the Reserve Bank of Australia and the US Federal Reserve to also target full employment. At its last meeting in June, the RBNZ said that while policy should remain tight, “the extent of this tightness will diminish over time in line with the expected decline in inflation pressures”. Today’s report offers mixed messages on this front, although leading indicators such as rising participation and underutilization suggest that risks to wage growth, and hence inflation, remain on the downside. With the RBNZ meeting due next Wednesday, markets are pricing in a 25bp rate cut as unlikely.
