NZD yawns as manufacturing index slows

The New Zealand dollar has posted small gains in Friday trade. In the European session, NZD/USD is trading at 0.7190, up 0.13% on the day. The pair is down 1.22% this week and is poised to have its worst weekly performance since mid-March.

NZ Manufacturing Index slows

The BusinessNZ Manufacturing Index fell in April to 58.4, down from 63.6. Although this was a significant drop, investors do not appear to be concerned, as the response of the New Zealand dollar has been muted. The index still remains well into expansionary territory, above the 50-level which separates expansion from contraction. Global conditions have improved, which bodes well for the manufacturing sector.

The New Zealand dollar plunged on Wednesday, as risk sentiment deteriorated after the US inflation report massively outperformed. This sent global equity markets and risk currencies like the New Zealand dollar sharply lower. The surge in inflation was a signal for many investors that higher inflation is here to stay, despite the Federal Reserve’s insistence that the uptick in inflation is transient.

How will the Fed respond to the dramatic inflation report? There seems to be some split in opinion within the Fed, which means that the market will be monitoring every Fed utterance with a fine-tooth comb. Fed member Robert Kaplan made headlines recently when he publicly called on the Fed to have a discussion about tapering, warning that there were “excesses and imbalances” in the economy and that the recovery was taking place faster than anticipated.

The opposite stance was expressed by Fed member Lael Bainbaird, just one day before the bombshell inflation report. Brainard argued that inflation risks are a “transitory surge” and urged the Fed to remain patient and continue its ultra-dovish monetary policy. She pointed to the weak nonfarm payrolls report last week as an indication that the US recovery still has a ways to go, saying that, “today, by any measure, employment remains far from our goals.”

Any hint by the Fed that it could tighten policy by reducing its QE purchases would be bullish for the US dollar. This means that comments from Fed policymakers in the coming days and weeks could have a significant impact on the direction of the US dollar.

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NZD/USD Technical

• NZD/USD faces resistance at 0.7350. Above, there is resistance at 0.7417
• There is support at 0.7166 and 0.7049

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