New Zealand dollar extends slide

The New Zealand dollar remains under pressure and is in negative territory at the start of the week. Earlier in the day, NZD/USD dropped to 0.6813, its lowest level since March 16th.

Markets await RBNZ rate decision

The RBNZ, like many other major central banks, is finding itself playing catch-up with soaring inflation. The Federal Reserve, for example, is widely expected to bring out the heavy ammunition; namely, one or more 0.50% rate hikes in order to curb inflation. The markets are expecting the RBNZ to follow suit with hawkish forward guidance. However, the consensus is that the RBNZ will increase rates by just 0.25% at this week’s meeting, which would bring the Cash Rate to 1.25%. This could result in disappointment in the markets and send the New Zealand dollar sharply lower.

Some economists are predicting a 0.50% hike at the meeting, and the uncertainty could well contribute to NZD/USD volatility around the time of the rate decision. The RBNZ is well on its way to normalization, with the central bank’s forecasts predicting that rates will climb to 2.5% over the next 12 months and peak around 3.25% at the end of 2023.

Later today, New Zealand is expected to release the NZIER Business Confidence index. In Q4, business confidence worsened, falling from -11 to -28, due to the Covid lockdowns and shortages of material and labour. The lockdowns are gone but the shortages remain, and with high inflation hurting businesses, I expect another decline in the NZIER Business Confidence index.

There are concerns about China’s growth, as Covid cases rise while the government presses ahead with its Covid-zero policy. The city of Shanghai remains in lockdown and if the government extends lockdowns to other cities, the economic outlook will certainly worsen. The property crisis hasn’t been in the headlines but remains a potent problem. Zhenro Properties, a major developer, has officially defaulted on some US dollar bonds, worth USD 540 million.

NZD/USD technical

• 0.6980 is the first line of resistance, followed by 0.7113.

• There is support at 0.6902 and 0.6769.