NZD/USD Price Analysis: Strongly recovers from 0.5900 after mix US flash PMI
|- NZD/USD recovers swiftly from 0.5910 as the US Dollar corrects.
- The US Dollar weakens after mixed US S&P flash PMI for July.
- China’s dismal economic prospects and increased RBNZ rate-cut bets have weighed on the New Zealand Dollar.
The NZD/USD pair recovers sharply after plunging to near 0.5910 in Wednesday’s American session. The Kiwi asset bounces back as the US Dollar (USD) corrects sharply after mix United States (US) S&P Global flash PMI data for July. The Manufacturing PMI surprisingly contracted, while the Services PMI expanded at a faster pace. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, declines from a fresh weekly high of 104.50.
Despite a decent recovery in the Kiwi asset, its near-term outlook remains vulnerable. The New Zealand Dollar (NZD) has delivered a negative closing against the US Dollar for four trading sessions in a row till Tuesday. Though the major has bounced back it is still in losses.
The Kiwi dollar has remained under pressure due to growing speculation that the Reserve Bank of New Zealand (RBNZ) will begin reducing interest rates this year. The expectations for early rate cuts have been prompted by easing price pressures. In the second quarter, inflationary pressures grew at a slower pace of 0.4% from the estimates and the former release of 0.6%. Annually, the price index has decelerated sharply to 3.5%.
Meanwhile, China’s dismal economic outlook has also weighed on the New Zealand Dollar. It is worth noting that New Zealand is one of the leading trading partners of China.
NZD/USD weakened after a breakdown of the Wyckoff Distribution formation on a daily timeframe. The Wyckoff Distribution exhibits the transfer of inventory from institutional investors to retail participants. The asset may find support near the trendline around 0.5900, plotted from 26 October 2023 low at 0.5770.
The declining 20-day Exponential Moving Average (EMA) near 0.6055 suggests that the overall trend is bearish.
The 14-day Relative Strength Index (RSI) declines into the bearish range of 20.00-40.00, suggesting that a bearish momentum has been triggered.
More downside would appear if the asset breaks below 19 April low around 0.5850. This would drag the asset towards the round-level support of 0.5800, followed by 26 October 2023 low at 0.5770.
In an alternate scenario, a recovery move above the psychological resistance of 0.6000 would shift the trend toward the upside. This would push the asset higher to May 3 high at 0.6046 and July 17 high near 0.6100.
NZD/USD daily chart
New Zealand Dollar FAQs
The New Zealand Dollar (NZD), also known as the Kiwi, is a well-known traded currency among investors. Its value is broadly determined by the health of the New Zealand economy and the country’s central bank policy. Still, there are some unique particularities that also can make NZD move. The performance of the Chinese economy tends to move the Kiwi because China is New Zealand’s biggest trading partner. Bad news for the Chinese economy likely means less New Zealand exports to the country, hitting the economy and thus its currency. Another factor moving NZD is dairy prices as the dairy industry is New Zealand’s main export. High dairy prices boost export income, contributing positively to the economy and thus to the NZD.
The Reserve Bank of New Zealand (RBNZ) aims to achieve and maintain an inflation rate between 1% and 3% over the medium term, with a focus to keep it near the 2% mid-point. To this end, the bank sets an appropriate level of interest rates. When inflation is too high, the RBNZ will increase interest rates to cool the economy, but the move will also make bond yields higher, increasing investors’ appeal to invest in the country and thus boosting NZD. On the contrary, lower interest rates tend to weaken NZD. The so-called rate differential, or how rates in New Zealand are or are expected to be compared to the ones set by the US Federal Reserve, can also play a key role in moving the NZD/USD pair.
Macroeconomic data releases in New Zealand are key to assess the state of the economy and can impact the New Zealand Dollar’s (NZD) valuation. A strong economy, based on high economic growth, low unemployment and high confidence is good for NZD. High economic growth attracts foreign investment and may encourage the Reserve Bank of New Zealand to increase interest rates, if this economic strength comes together with elevated inflation. Conversely, if economic data is weak, NZD is likely to depreciate.
The New Zealand Dollar (NZD) tends to strengthen during risk-on periods, or when investors perceive that broader market risks are low and are optimistic about growth. This tends to lead to a more favorable outlook for commodities and so-called ‘commodity currencies’ such as the Kiwi. Conversely, NZD tends to weaken at times of market turbulence or economic uncertainty as investors tend to sell higher-risk assets and flee to the more-stable safe havens.
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