NZ dollar rebounds on inflation expectations

The New Zealand dollar has started the week with strong gains. In the European session, NZD/USD is trading at 0.6281, up 0.63% on the day.

US Nonfarm payrolls send dollar higher

The week ended with a bang as US nonfarm payrolls smashed it out of the ballpark. The July release came in at 528 thousand, well above the estimate of 250 thousand. The immediate effect of the massive NFP release was the US dollar posting broad gains on Friday, as NZD/USD slid almost 1%, but the currency has recovered much of those losses today.

The US employment report points to a labour market that remains tight. Unemployment ticked down to 3.5% from 3.6%, and wage growth remained unchanged at 5.2%, ahead of the forecast of 4.9%. For the Fed, the strong gain in wages is well above the Fed’s inflation target of 2% and lends support to another supersize rate 0.75% hike come September.

The US labour market remains robust, but the sharp tightening of rates has reduced activity in other parts of the economy, especially manufacturing and goods and service. Still, the US does not appear to be in a recession despite all the noise after two straight negative quarters of GDP. There is no set definition for a recession, but one view is that it is a significant decline in activity across the economy, and that is clearly not the case in the US, with a red-hot labour market.

In New Zealand, RBNZ Inflation Expectations ticked lower in Q2, dropping to 3.07%, down from 3.27% in Q1. This is close to the central bank’s upper band of its inflation target of 3%. Inflation, which rose to 7.3% in the second quarter, has yet to peak, but the slight fall in inflation expectations will be welcomed by the RBNZ, as it marks the first drop after eight straight quarters of acceleration. The RBNZ meets next Wednesday and is likely to raise rates by 0.50%.

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NZD/USD Technical

• 0.6271 has switched to resistance and is a weak line. Above, there is resistance at 0.6350
• There is support at 0.6213 and 0.6134

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