The NZD/USD pair has seen gains on Thursday, following a positive sentiment in the global market and the Federal Reserve’s decision to adopt an easing bias in its May policy meeting. The Kiwi currency has edged higher by almost eight-hundredths of a percent, reaching the 0.5930s. This positive movement is a result of an improvement in risk appetite, driven by falling Oil prices and the overall market-positive outcome of the Fed meeting.
Lower Oil prices have reduced costs for businesses and alleviated headline inflation, which has benefited commodity currencies like the Kiwi. Additionally, the Fed’s decision to slow the reduction in its US Treasury bonds holdings has weakened the US Dollar in most pairs, including the NZD/USD. However, despite the recent gains, the pair is likely to remain under pressure in the longer-term due to the poor economic performance of New Zealand.
Recent data from Statistics New Zealand has painted a gloomy picture of the New Zealand economy, with the Unemployment Rate rising to 4.3% in Q1, its highest level in three years. The country is in a technical recession after two quarters of negative growth, and headline inflation has fallen to 4.0% in Q1 from 4.7% previously. Building permits have also seen a decline, pointing to a drag on growth. Business confidence has also fallen, indicating weakening economic conditions in the country.
The Reserve Bank of New Zealand (RBNZ) is facing a dilemma between the need to boost the economy with lower interest rates and concerns about inflation not falling fast enough. The bank appears to be split between doves who want to cut rates and hawks who oppose it. With the economic situation in New Zealand worsening, the RBNZ is likely to be the first to cut interest rates, compared to the Federal Reserve’s neutral position.
In conclusion, the NZD/USD pair is expected to face continued pressure in the longer-term due to the poor performance of the New Zealand economy. The RBNZ’s potential decision to cut interest rates, coupled with weak economic data, is likely to weigh on the Kiwi currency. Traders will be closely watching developments in both New Zealand and the US to determine the future direction of the NZD/USD pair.
