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NZD is Experiencing Challenges with Forecasts
Information is not investment advice
- Reserve Bank of New Zealand will likely deliver up to two interest rate hikes before the end of the year.
- Risk-off flows strengthening in the NZD/USD pair.
- Chinese economic outlook downgrade, inflation causing concern.
The risk-sensitive New Zealand Dollar weakened overnight as global concerns over the highly transmissible Delta Covid variant weighed on sentiment. The US Dollar is also weighing on NZD as rate hike bets rise following last week’s NFP report. Moreover, Goldman Sachs downgraded its growth forecast for China. Analysts at the bank see Covid-induced lockdowns and social distancing measures dragging on spending and consumption.
Why is it important?
Foreign exchange markets are presently focused on central bank interest rate normalization, favoring the currencies belonging to those central banks which will lead the pack. July 14, 2021, RBNZ (Reserve Bank of New Zealand) said it will reduce monetary stimulus by ceasing quantitative easing. It was the first sign of a future interest-rate increase. Shortly after, New Zealand’s unemployment rate was released, with actual results being less-than-expected by as much as 0.4% (4% vs. 4.4%, this is a good sign to an overall economic situation).
The labor market report is the latest sign that the economy is growing faster than its capacity, and that the Reserve Bank could start to raise the official cash rate to keep a lid on price pressures. Annual inflation surged to 3.3% in the second quarter, breaching the central bank’s 1-3% target range.
If RBNZ continues normalizing interest rates by raising them, we would expect strong fundamental support for the New Zealand Dollar. August 18, RBNZ will release several essential market reports. Among them are the Official Cash Rate, RBNZ Monetary Policy Statement, and Rate Statement. Considering the facts given, we’re expecting rate hikes as well as NZD strengthening against other currencies.
However, while the Chinese economy is vital to global growth and capital markets, New Zealand is particularly susceptible due to its economic and trade proximity. Covid related risks are also present, although the market participants ignored Delta's initial spread. Make sure to check our Economic Calendar regularly!
Considering the newfound pessimism for the economic outlook in China, the New Zealand Dollar may remain capped near current levels. Still, NZD bulls may be able to take advantage of the situation. The Australian Dollar typically displays a higher correlation with China’s economy, which can open the door for AUD/NZD to underperform.
Currently, AUD/NZD pair has a support line at 1.04594 and resistance at 1.10595, right at 38.2 Fibonacci retracement level.
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Inflation in New Zealand is the highest since 1990, edging to 7.3% in Q2 2022. The currency is under heavy pressure as the Reserve Bank of New Zealand is trying to reverse the inflationary spiral. The week ahead will give us a valuable clue about the country’s monetary policy, and we are here to talk about that.
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