New Zealand Treasury: There is no near-term turning point seen for the economy

Source Fxstreet
May 20, 2024 23:42

The New Zealand Treasury's Economic Update issued late last week showed that there is no near-term turning point seen for the economy and the consensus expects the Reserve Bank of New Zealand (RBNZ) to hold interest rate on Wednesday.   

Key quotes

“Weak housing market, lower food prices and expected inflation highlight low demand.”

“No turning point in sight amid lower retail spending and sector-wide business activity.”

“Weaker-than-expected credit data, along with soft inflation, easing sentiment in manufacturing and services surveys and persistent housing market weakness confirm subdued domestic demand amidst weak consumer confidence.”

“Indicators continue to point to low demand heading into the second quarter, affecting consumers and businesses alike.”

“A convincing drop in inflation expectations, discretionary spending and normalising patterns of migration will be welcome news to the Reserve Bank but a rate cut at week’s Monetary Policy Statement is unlikely.”

“Furthermore, business sentiment across all sectors show no sign of a turning point in the near term painting a bleak picture at least in the domestic economy.”

Market reaction 

The NZD/USD pair is trading higher by 0.02% on the day to trade at 0.6107, as of writing.

New Zealand Dollar FAQs

The New Zealand Dollar (NZD), also known as the Kiwi, is a well-known traded currency among investors. Its value is broadly determined by the health of the New Zealand economy and the country’s central bank policy. Still, there are some unique particularities that also can make NZD move. The performance of the Chinese economy tends to move the Kiwi because China is New Zealand’s biggest trading partner. Bad news for the Chinese economy likely means less New Zealand exports to the country, hitting the economy and thus its currency. Another factor moving NZD is dairy prices as the dairy industry is New Zealand’s main export. High dairy prices boost export income, contributing positively to the economy and thus to the NZD.

The Reserve Bank of New Zealand (RBNZ) aims to achieve and maintain an inflation rate between 1% and 3% over the medium term, with a focus to keep it near the 2% mid-point. To this end, the bank sets an appropriate level of interest rates. When inflation is too high, the RBNZ will increase interest rates to cool the economy, but the move will also make bond yields higher, increasing investors’ appeal to invest in the country and thus boosting NZD. On the contrary, lower interest rates tend to weaken NZD. The so-called rate differential, or how rates in New Zealand are or are expected to be compared to the ones set by the US Federal Reserve, can also play a key role in moving the NZD/USD pair.

Macroeconomic data releases in New Zealand are key to assess the state of the economy and can impact the New Zealand Dollar’s (NZD) valuation. A strong economy, based on high economic growth, low unemployment and high confidence is good for NZD. High economic growth attracts foreign investment and may encourage the Reserve Bank of New Zealand to increase interest rates, if this economic strength comes together with elevated inflation. Conversely, if economic data is weak, NZD is likely to depreciate.

The New Zealand Dollar (NZD) tends to strengthen during risk-on periods, or when investors perceive that broader market risks are low and are optimistic about growth. This tends to lead to a more favorable outlook for commodities and so-called ‘commodity currencies’ such as the Kiwi. Conversely, NZD tends to weaken at times of market turbulence or economic uncertainty as investors tend to sell higher-risk assets and flee to the more-stable safe havens.

 

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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