New Zealand dollar poised to break below key 0.60 level

The New Zealand dollar has extended its slide for a fourth straight day. In the European session, NZD/USD is trading at 0.6005, down 0.26%. New Zealand

It’s been an awful ride for the New Zealand currency, which is down 1.50% this week. NZD/USD hasn’t posted a winning week since early July and has plunged 270 basis points since then. The latest setback for the New Zealand dollar is the soft data out of China, which is New Zealand’s biggest trading partner.

China’s highly-touted recovery has been a bust. The government abruptly shifted its Covid policy from zero tolerance to reopening the economy, and the hope was that economic activity would soar. Instead, domestic demand has been weak and a soft global economy has meant less demand for Chinese goods. This week’s trade release indicated in a decline in China’s exports and imports. The economy has slowed to such an extent that the country is officially in a deflation phase – CPI for July declined for the first time since February 2021.

A slowdown in China is especially bad news for commodity currencies like the New Zealand dollar, which has fallen sharply this week due to the soft trade and inflation reports out of China. If the Chinese economy weakens further, I would expect the New Zealand dollar to lose even more ground.

The Reserve Bank of New Zealand meets on August 16^th and there is a strong likelihood that it will hold rates for a second straight month. The RBNZ has been signalling that its rate-tightening cycle is over but that it will maintain rates in restrictive territory. This could well mean an extended pause until the central bank feels that conditions are ripe for rate cuts.

New Zealand inflation has been moving in the right direction, but the current 6% clip is much too high. The key question is whether high rates will filter into the economy and continue to push inflation lower without the need for additional rate hikes. The RBNZ will be keeping a close eye on inflation and employment numbers in order to determine its future rate path.

US inflation rises, but Fed expected to pause

US headline inflation rose in July to 3.2%, above the June gain of 3.0% but below the 3.3% consensus estimate. Core CPI nudged lower to 4.7% in July compared to the June reading of 4.8% which was also the estimate. The report was within expectations and should cement a pause in rates in September, with the odds of a rate hike at just 10%, according to the CME FedWatch.

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NZD/USD Technical

• NZD/USD is testing support at 0.6031. Below, there is support at 0.5964
• 0.6129 and 0.6196 are the next resistance lines

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