- The New Zealand dollar finds it hard to resist Fed-led USD strength,
- A strong economy and a central bank already hiking can help NZD/USD recover.
- New Zealand's dependence on dairy products is also a positive for the kiwi.
Where next for NZD/USD? What moves this currency pair? These are questions we have received from a user, and here are some answers.
NZD/USD has been in a downtrend since failing to break above 0.7220 in October. The main driver has been the US Federal Reserve's hawkishness. First came hints about tapering its bond-buying scheme, then the announcement, and lately the news that the Fed will double the pace of reducing its bond-buying scheme. That means a rate hike coming as early as March, and perhaps in May.
The strength of the US dollar has been too much for the New Zealand dollar, and that will likely persist for longer. However, the currency of the small Pacific nation has reasons to rise when the dust settles – or at least to outperform its peers.
First, the Reserve Bank of New Zealand (RBNZ) is not sitting on the sidelines – it raised interest rates both in October and then in November. That is faster than all other G10 countries, most of whom have only begun signaling tighter policy.
The RBNZ's is backed by a robust economy. While it squeezed by with 3.7% growth in the third quarter, it was better than projected and is the third consecutive surprise. The labor market is even more impressive, with the unemployment rate falling to only 3.4% in the third quarter – envy for the entire world.
Similar to most countries, inflation is rising in New Zealand, hitting a quarterly rate of 2.2% in the third quarter, far above 1.5% expected.
Zooming even further out, New Zealand has an advantage over other countries in that it relies on the export of agricultural goods, mostly dairy products. That contrasts with Australia's metal resources and Canada's oil. If China imposes more lockdowns due to Omicron or extends the crackdown on its property sector, that would have no impact on its demand for food, though it would affect demand for Australian iron ore.
Another source of income for New Zealand is its tourism sector, which was basically shut down to foreign visitors during most of the covid era. Only recently has the country reopened to visitors from abroad. If the economy is doing so well without foreign tourists, it could further thrive when they come back.
How does the Fed-driven dollar match with New Zealand's upbeat fundamentals? In the short-term, bears will likely remain on top, as King Dollar reigns supreme. They could receive further boosts from Nonfarm Payrolls and later from US inflation data.
Later on, the kiwi could claw its way back up. While most economic releases in New Zealand are only quarterly, they tend to have a significant impact.
Technically, the 2021 trough of 0.67 is critical support, and losing it opens the door to a quicker fall. It is backed up by 0.6730. Resistance is at 0.6860, which held NZD/USD down in recent days and also served as support in September. Further above, 0.6980 defends the round 0.70 level.
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