2023.06.28 2023.06.28
Kiwi hit by the truth. Forecast as of 28.06.2023Dmitri Demidenkohttps://www.litefinance.org/blog/authors/dmitri-demidenko/
Unlike the Fed, which expresses confidence in the soft landing for the US economy, the Reserve Bank of New Zealand has been more sincere, claiming that a recession is needed to press down inflation. How did it affect NZDUSD? Let us discuss the Forex outlook and make up a trading plan.
Monthly New Zealand dollar fundamental forecast
The three largest banks in New Zealand predict that even if its economy manages to get out of a technical recession, it will soon plunge into a new recession. The full effect of the 525-basis-point rate hike has yet to come and will hurt households as borrowing costs rise. Bloomberg expects a zero GDP expansion compared to +2.7% in 2022. Coupled with the alarming news from China, the double recession suggests a soon NZDUSD downtrend.
The Reserve Bank of New Zealand was a pioneer in monetary tightening. It started raising the cash rate in October 2021 and brought the rate to a peak of 5.5% in 20 months. It’s faster and higher than the Fed. At the same time, the end of the monetary policy tightening cycle at the end of May shocked the local currency. Nevertheless, the New Zealand dollar managed to recover due to a rise in the global risk appetite and the pause in the Fed’s monetary tightening.
Unlike many other central banks, the RBNZ didn’t sound ambiguous. The governor said a recession is necessary to win a battle with the high inflation. The technical downturn came to New Zealand at the turn of 2022 and 2023. At the same time, consumer price growth finally began to slow down.
Dynamics of inflation in New Zealand
Source: Bloomberg.
The end of the rate hike cycle is negative for the local currency. The kiwi’s weak position is aggravated by the news coming from China. Industrial profits fell 12% in May, and domestic travel spending during the recent Dragon Boat Festival celebrations was lower than before the pandemic. Sales of houses and cars also plunged. The main trading partner’s economy is recovering more slowly than expected, leading to a severe weakening of the yuan and putting pressure on its proxy currencies, the AUD and the NZD.
Besides, Bloomberg analysts expect a further reduction in the rate on the PBoC one-year loans to 2.6%, an increase in infrastructure spending, and tax deductions for consumers. Stimulus measures should revive domestic demand and help NZDUSD bulls in the medium term.
Dynamics of PBoC interest rates
Source: Bloomberg.
I suppose the kiwi could continue falling. Among the bearish drivers are the growth gap between the US and New Zealand and the divergence in monetary policies of the Fed and the RBNZ. The futures market expects a 25-basis-point increase in the federal funds rate to 5.5% in July with a 77% probability. Derivatives raised the chances of its growth to 5.75% by the end of the year from 10% to 20% after a series of strong US domestic data.
Monthly NZDUSD trading plan
However, in the second half of the year, due to the acceleration of the Chinese economic recovery amid monetary and fiscal stimulus, the NZDUSD trend could turn up. In this regard, it makes sense to switch from short-term sales with targets of 0.603, 0.0595, and 0.588 to medium- and long-term purchases on the rebound from these support levels.
Price chart of NZDUSD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.
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