NZD/USD edges higher as upbeat New Zealand data offsets cautious US Dollar tone
- NZD/USD rises toward 0.5894, snapping a two-day losing streak while holding within weekly range.
- Stronger NZ Business PMI and higher RBNZ inflation expectations support the Kiwi.
- DXY trades flat ahead of US consumer sentiment data, as weak US indicators fuel Fed rate cut bets
NZD/USD edges higher to trade near 0.5894 at the start of the American trading hours on Friday, snapping a two-day losing streak. The pair is holding within this week’s range as it draws support from upbeat domestic data and rising inflation expectations. The 50-day Exponential Moving Average (EMA) near the 0.5850 psychological level offers a solid technical floor.
New Zealand’s Business NZ Purchasing Managers’ Index (PMI) climbed to 53.9 in April from 53.2, reflecting ongoing expansion in the manufacturing sector and offering signs of resilience in the local economy. Meanwhile, the Reserve Bank of New Zealand’s (RBNZ) quarterly survey showed businesses now expect inflation to average 2.29% over the next two years, up from 2.06% in the prior quarter.
While the RBNZ is still widely expected to deliver a 25 basis point rate cut later this month, the pickup in inflation expectations may cause policymakers to proceed more cautiously going forward.
ASB Bank senior economist Mark Smith said the central bank would be "somewhat wary" of the rise in inflation expectations, adding that recent tariff-related concerns could further fuel price pressures. “We still expect a 25bp OCR cut later this month and a 2.75 percent OCR endpoint, but this is conditional on the expected mid-2025 lift in inflation proving to be transitory,” he noted.
On the United States (US) side, the US Dollar Index (DXY) trimmed earlier losses and trades flat around 100.30 on Friday. The US Dollar found some support as hopes grew for easing tensions between the US and China, along with expectations that the Federal Reserve (Fed) could start cutting interest rates in the coming months.
This week’s US economic data has mostly been weak, with Housing Starts, Building Permits, and inflation readings (CPI and PPI) all coming in below expectations. Retail sales were also softer than forecast. These signs of slowing momentum have strengthened bets on two Fed rate cuts this year. However, a surprise increase in export and import prices added some uncertainty to the outlook.
The preliminary University of Michigan Consumer Sentiment report for May showed confidence falling sharply to 50.8 from 52.2 in April, well below expectations of 53.4. The sharp decline signals growing concerns among US households and adds to the case for Fed policy easing in the months ahead.
Looking ahead, attention will turn to a series of key New Zealand economic data releases next week, beginning with the Producer Price Index (PPI) on Monday.
RBNZ FAQs
The Reserve Bank of New Zealand (RBNZ) is the country’s central bank. Its economic objectives are achieving and maintaining price stability – achieved when inflation, measured by the Consumer Price Index (CPI), falls within the band of between 1% and 3% – and supporting maximum sustainable employment.
The Reserve Bank of New Zealand’s (RBNZ) Monetary Policy Committee (MPC) decides the appropriate level of the Official Cash Rate (OCR) according to its objectives. When inflation is above target, the bank will attempt to tame it by raising its key OCR, making it more expensive for households and businesses to borrow money and thus cooling the economy. Higher interest rates are generally positive for the New Zealand Dollar (NZD) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken NZD.
Employment is important for the Reserve Bank of New Zealand (RBNZ) because a tight labor market can fuel inflation. The RBNZ’s goal of “maximum sustainable employment” is defined as the highest use of labor resources that can be sustained over time without creating an acceleration in inflation. “When employment is at its maximum sustainable level, there will be low and stable inflation. However, if employment is above the maximum sustainable level for too long, it will eventually cause prices to rise more and more quickly, requiring the MPC to raise interest rates to keep inflation under control,” the bank says.
In extreme situations, the Reserve Bank of New Zealand (RBNZ) can enact a monetary policy tool called Quantitative Easing. QE is the process by which the RBNZ prints local currency and uses it to buy assets – usually government or corporate bonds – from banks and other financial institutions with the aim to increase the domestic money supply and spur economic activity. QE usually results in a weaker New Zealand Dollar (NZD). QE is a last resort when simply lowering interest rates is unlikely to achieve the objectives of the central bank. The RBNZ used it during the Covid-19 pandemic.