The NZD/USD currency pair reached a four-week high yesterday, registering at 0.6355. The last time the "kiwi" was in this price range was on April 5, when the Reserve Bank of New Zealand unexpectedly raised the interest rate by 50 basis points. Today, the growth of NZD/USD is due to different reasons: buyers have strengthened their positions against the backdrop of fairly good data on the growth of the labor market in New Zealand, which were published last week.
At the same time, it is too early to talk about a hawkish sentiment regarding further actions of the RBNZ. The dynamics of inflation indicators tilt the balance, if not towards a pause, then at least towards a moderate scenario, implying a 25-point increase in the rate at the next meeting.
Inflation slows down
Let's start with the fact that the next meeting of the Reserve Bank of New Zealand will take place quite soon, namely on May 24. Therefore, certain trends can be fixed now. And at the same time, it can be assumed that if these trends persist in the coming months, the RBNZ may significantly curb its enthusiasm, putting pressure on the "kiwi."
However, the results of the May meeting of the New Zealand central bank may also unpleasantly surprise NZD/USD buyers, given some recent reports about the dynamics of inflationary growth. According to the latest data, the consumer price index in New Zealand in the first quarter fell to a 6.7% annual rate. This is the weakest growth rate in the last year (the indicator was lower only in the fourth quarter of 2021). At the same time, most experts predicted a more modest decline in the indicator – to 7.1% (for comparison, in the fourth quarter of 2022, the index reached 7.2%). In quarterly terms, the CPI also came out in the "red zone": with a growth forecast of 1.5%, it fell in the first quarter to 1.2%.
The data on the growth of the labor market in New Zealand, published last week, also reflected a slowdown in pro-inflationary indicators. The wage level in the private sector (including bonuses) grew by 0.7% in the first quarter, with a growth forecast of 1.1%. A downward trend has been recorded for the second quarter in a row. Excluding bonus payments, the wage indicator showed a similar trajectory: a 0.9% increase with a 1.2% growth forecast. In this case, the downward trend is recorded for the third quarter in a row.
The wage component is the only component of the New Zealand jobs report that came out in the red zone. On the contrary, all other indicators turned out to be better than expected. The unemployment rate was 3.4%, with a growth forecast of 3.5%. The growth in the number of employed people was also surprising, which rose 2.5% annually, with a consensus forecast of 1.8%. On a quarterly basis, the indicator was also in the green zone – a growth of 0.8% with a forecast of 0.5%.
"Aggressiveness" of RBNZ in question
The latest releases indicate a decrease in inflation against the backdrop of an improving labor market situation. Given this dynamic, the Reserve Bank of New Zealand may reconsider its aggressive policy, lowering the rate hike pace to 25 basis points. It should be emphasized that following the previous – April – meeting, the regulator essentially refuted assumptions that the current monetary policy tightening cycle is nearing its end. The meeting minutes stated that the central bank "should continue to raise rates further to bring inflation back to the target level of 1%–3%."
However, given the fact that the pace of inflation growth in the country has slowed down, it can be assumed that the balance will gradually lean towards a more moderate pace of monetary policy tightening. It is also worth noting that reports on the growth of the consumer price index in New Zealand are published quarterly, so at the May meeting, RBNZ members will be operating with the above figures: the next inflation release is expected in July.
Conclusions
The upward trend of NZD/USD is built on rather shaky grounds, so long positions in the pair are risky. If the U.S. inflation reports (especially tomorrow's release of CPI growth data in the U.S.) supports the greenback, the New Zealand dollar will not withstand the blow: a large-scale correction will follow the pair.
From a technical standpoint, the NZD/USD pair is trying to overcome the upper Bollinger Bands line on the daily chart (0.6350), but two-day attempts have not been successful. In general, the prospects for the upward trend will depend on the "well-being" of the U.S. currency. If U.S. inflation data disappoint the greenback, NZD/UZD buyers may try to approach the next price barrier at 0.6450 (the upper Bollinger Bands line on the weekly chart). If, however, the U.S. dollar strengthens its positions following the upcoming releases, a price pullback may follow – up to the 0.6240 mark (Kijun-sen line on the D1 timeframe). The kiwi will follow the greenback, so when making trading decisions, it is necessary to focus on the dynamics of the U.S. dollar index, which, in turn, is awaiting key reports of the week.