NZ dollar shines as US dollar retreats

The New Zealand dollar continues to take advantage of US dollar weakness. NZD/USD posted sharp gains last week, climbing 2.01%.

Will Business Confidence improve?

The week kicks off with ANZ Business Confidence, which has been in deep-freeze for months. The indicator was almost unchanged at -42.0 in April, which means that close to half of New Zealand businesses expect economic conditions to worsen during the next 12 months.

The government has eased Covid restrictions, which is good news for the business sector, in particular for services such as hospitality and recreation. The upcoming survey is likely to show that businesses continue to struggle with two main issues - surging inflation and shortages of materials and workers.

Businesses have seen their operating costs, including wages, accelerate rapidly and this is forcing them to pass on higher costs. Inflation has hit 30-year highs and no 'inflation peak' appears in sight, despite aggressive rate hikes from the RBNZ. Perhaps as important, business expect CPI to remain high. Two-year expectations have risen to 3.29% and five-year expectations have risen to 2.42%, well above the RBNZ's inflation target of 1%-3%.

The RBNZ has repeatedly said that its hawkish policy is aimed at curbing both inflation and inflation expectations. 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".

Orr added that he expects the cash rate, which is currently at 2%, to rise to 4% in mid-2023. This means that the RBNZ will continue be aggressive and we can expect further 50-bps rate hikes, if the central bank feels that the economy is strong enough for aggressive rate therapy.

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NZD/USD Technical

• NZD/USD is testing resistance at 0.6475. Above, there is resistance at 0.6540
• There is support at 0.6352 and 0.6287