NZ dollar slips on soft mfg. data

The New Zealand dollar has reversed directions on Friday and recorded considerable losses. Currently, NZD/USD is trading at 0.7176, down 0.55% on the day.

New Zealand CPI was stronger than expected in the fourth quarter of 2020. Inflation climbed 0.5%, well above the RBNZ forecast of 0.2%. Westpac Banking had forecast that CPI would remain flat, and sought to explain the surprise reading by the fact that Covid-19 had disrupted prices in the Q4, in particular big-ticket Christmas items.

The annual inflation remained at 1.4%, which is in the lower part of the RBNZ’s inflation target range of 1-3 per cent. What is significant about inflation remaining on the lower side of the range is that there are no inflationary pressures on the central bank to lower interest rates anytime soon. At the same time, New Zealand’s economy has recovered to its pre-pandemic levels, and the New Zealand dollar has shown marked appreciation against the US dollar in recent months. Given that the RBNZ will likely be less inclined to lower rates in 2021, this provides more scope for the New Zealand dollar to continue to rise.

On the manufacturing front, the BusinessNZ Manufacturing Index ended 2020 on a disappointing note with the December release. The index had reeled off six straight readings in expansionary territory until the December reading, which came in at 48.7, down sharply from 55.3 beforehand. Manufacturing improved dramatically in H2 of 2020, after the index was deep in contraction territory in the second quarter, when the economy was hit hard by Covid-19. At the same time, the index is only slightly below the 50-level, which separates contraction from expansion. With the global economy slowly finding its footing, I would expect New Zealand’s manufacturing sector to rebound in the early part of 2021.

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NZD/USD Technical

• NZD/USD is putting pressure on resistance at 0.7207. This is followed by resistance at 0.7284
• There is support at 0.7086. Below, we find support at 0.7042
• The pair is just above the 20-day moving average (MA) at 0.7170. A close below this line would be a bearish technical signal.

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