New Zealand dollar mini-rally fizzles

NZD/USD is in negative territory today, after three days of slight gains. In the European session, NZD/USD is trading at 0.5622, down 0.33%. On Thursday, the New Zealand dollar fell as low as 0.5512, its lowest level since March 2020.

NZ Manufacturing PMI slows

New Zealand’s Manufacturing PMI slowed in September to 52.0, down from 54.8 in August. The PMI remained in expansion territory (above 50.0), but new orders fell sharply to 48.4, down from 59.7. New Zealand is very dependent on foreign trade, and the slowdown in global Manufacturing PMI to 48.4 in September, the lowest since Covid started, is a warning sign of a possible global recession. This could dampen New Zealand’s economy and weigh on the New Zealand dollar.

The RBNZ has been aggressive with its rate-tightening cycle and plans to keep its foot on the pedal for some time yet. The Bank said at last week’s meeting that core consumer inflation is too high and the labour market remains tight, a signal that the central bank will continue to tighten until inflation has peaked.  Inflation hit 7.3% in Q2, up from 6.9% in Q1.

The Reserve Bank of New Zealand raised rates by 0.50% last week, bringing the cash rate to 3.5%. The Bank can rely on a decent GDP in Q2 of 1.7% and a strong labour market to continue hiking, but more oversize rates will make it difficult for the Bank to guide the economy to a soft landing and avoid a recession.

The outlook for the New Zealand dollar does not look promising. September was a disaster for the New Zealand dollar, which plunged a staggering 8.5% and fell to its lowest level since March 2020. NZD/USD has managed only minor inroads in October. The risk-sensitive currency faces significant headwinds. The escalating conflict in Ukraine, which has seen President Putin annex 15% of Ukrainian territory, a likely energy crisis in Europe this winter and a hawkish Federal Reserve are likely to continue weighing on the New Zealand dollar in the short term.

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NZD/USD Technical

• NZD/USD has support at 0.5530 and 0.5456
• There is resistance at 0.5672 and 0.5746

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