NZD/USD Surges 0.56% to 0.5961 Amid Shifting Market Sentiment

The New Zealand dollar (NZD) to US dollar (USD) exchange rate surged 0.56% to 0.5961 on Thursday, surpassing the 20-day Simple Moving Average. This movement indicates a potential short-term bullish bias despite a broader bearish trend. The rise is attributed to an improvement in global market sentiment, which has boosted commodity currencies like the Kiwi.

Why this matters: The shift in market sentiment and exchange rate fluctuations can have significant implications for international trade and investment, affecting businesses and individuals alike. A potential divergence in monetary policy between the US Federal Reserve and the Reserve Bank of New Zealand could also influence global economic trends and currency markets.

Several key factors have contributed to the increase in the NZD/USD exchange rate. Falling oil prices, which have reached a seven-week low in the mid-$79s, are reducing costs for businesses and alleviating headline inflation. Additionally, the outcome of the US Federal Reserve's policy meeting on Wednesday indicated that the central bank is not considering cutting interest rates, but neither is it entertaining the notion of raising them. The Fed's decision to slow the reduction in its holdings of US Treasury bonds, effectively unwinding the pace of quantitative tightening, has weakened the USD in most pairs.

However, the NZD/USD is likely to remain under pressure over the longer term on account of the poor performance of the New Zealand economy. This increases the chances that the Reserve Bank of New Zealand (RBNZ) will cut interest rates before the US Federal Reserve, which could hurt the NZD more than the USD. Recent data from Statistics New Zealand paints a grim snapshot of the country's economic health.

The New Zealand Unemployment Rate rose to 4.3% in Q1, its highest level in three years. The country is also in a technical recession after two-quarters of negative growth. Headline inflation fell to 4.0% (Core 3.7%) in Q1 from 4.7% previously. Building Permits fell 0.2% in March every month, with a 25.0% decline on an annual basis, suggesting residential investment will remain a drag on New Zealand growth. Additionally, Business Confidence fell to 14.9 in April, from 22.9 a month earlier, marking the lowest reading since last September.

According to Westpac Chief Economist Kelly Eckhold, the RBNZ appears to be split between doves who want to cut rates and hawks who want to raise them. "Weak growth and high unemployment would be aided by lower interest rates," Eckhold noted, but "inflation is not seen as falling fast enough in key areas to warrant lower interest rates."

The key question for NZD/USD is which central bank – the Fed or the RBNZ – will move to cut interest rates first. Given the worsening economic situation in New Zealand and the Fed's increasingly neutral position, the RBNZ seems more likely to be the first to make the move. This potential divergence in monetary policy could put further downward pressure on the NZD/USD exchange rate in the coming months.

Technical analysis also supports the notion of a short-term bullish bias for the NZD/USD, despite the broader bearish trend. The Relative Strength Index (RSI) stands just above the negative territory threshold on the daily chart, hinting at a slight uptrend. On the hourly chart, the RSI is at 66, slightly down after hitting the overbought threshold, indicating stronger short-term buying momentum. The Moving Average Convergence Divergence (MACD) presents green bars, showing positive momentum.

The NZD/USD's jump above the 20-day SMA suggests only a potential short-term upward trend, with the pair still lingering below the 100 and 200-day SMA, implying sustained selling pressure and a bearish market bias in the long term. Bulls are making arguments to be considered seriously and will start to set their sights on the 100-day SMA at 0.6100. However, the broader economic outlook in New Zealand and the potential for the RBNZ to cut interest rates before the Fed suggest that the Kiwi dollar may face significant challenges in the months ahead.

Key Takeaways

• NZD/USD exchange rate surges 0.56% to 0.5961, indicating short-term bullish bias.
• Falling oil prices and the Fed's policy meeting outcome boost commodity currencies like NZD.
• New Zealand's poor economic performance may lead to RBNZ cutting interest rates first.
• Technical analysis suggests a short-term uptrend, but a broader bearish trend remains.
• RBNZ's potential rate cut may put downward pressure on the NZD/USD exchange rate.