NZD falls as business confidence swoons

The New Zealand dollar rally has fizzled out on Tuesday. In the European session, NZD/USD is trading at 0.6517, down 0.63% on the day.

Business Confidence slides

New Zealand’s business sector remains deeply pessimistic about the economy. ANZ Business Confidence has been mired in negative territory for close to a year and the May reading fell to -55.6, down sharply from -42.0 in April. This means that more than half of New Zealand businesses expect economic conditions to worsen during the next 12 months.

There weren’t any surprises in the ANZ survey, with businesses noting that their two biggest problems are inflation and cost pressures. Inflation continues to be broad-based, and inflation expectations remain intense. One-year inflation expectations rose to 6.2%, much higher than the RBNZ’s inflation target of 1%-3%. The RBNZ is very concerned about inflation expectations, which can manifest into actual inflation. Governor Orr said last week that it was crucial that inflation expectations remain “anchored” and that a situation where higher inflation expectations become persistent had to be avoided “at all costs”.

The RBNZ finds itself in the middle of its aggressive rate-tightening cycle. The Bank raised the cash rate to 2.0% last week, up from 1.50%. Governor Orr has stated that he is looking to raise rates to 4% by mid-2023, which means that investors can expect plenty of tightening, which could mean additional 50-bps hikes. The RBNZ’s chief economist, Paul Conway, has acknowledged that a soft landing amidst aggressive rate hikes is “difficult to engineer” but said the economy was strong enough to handle a downturn due to the strong labour market. Conway added that 75-bps hikes were not being considered by the central bank.

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NZD/USD Technical

• 0.6492 is under pressure in support. Below, there is support at 0.6435
• There is resistance at 0.6593 and 0.6650

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