Finance

New Zealand Dollar uses 50-day Simple Moving Average as support for recovery

11/09/2023
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  • The New Zealand Dollar bounces on Thursday after finding a floor at the key 50-day SMA.
  • The Kiwi recovers after three days of losses and despite a worsening macro backdrop – normally a negative for NZD. 
  • NZD/USD remains in a long-term downtrend, with US labor data and commentary from Fed’s Powell as potential near-term influences. 

The New Zealand Dollar (NZD) recovers against the US Dollar (USD) on Thursday, despite a worsening macro picture after bouncing off technical support at the important 50-day Simple Moving Average (SMA). The 50-day SMA is used as a key guide to investing by institutional investors, such as pension fund managers, and retail traders alike. 

Daily digest market movers: New Zealand Dollar strengthens after meeting key average

  • The New Zealand Dollar trades higher against the US Dollar on Thursday despite the USD strengthening against most counterparts as reflected by the rise in the US Dollar Index (DXY). 
  • Downbeat Chinese inflation data continues to dampen the outlook for global growth. This would normally weigh on NZD, as it is a major commodity exporter – especially of dairy products – to China. However, the currency ignores the data and rises anyway.
  • The Kiwi’s unilateral strength is probably as a result of the NZD/USD reaching a significant chart level, the 50-day SMA, and then bouncing. 
  • The Chinese CPI unexpectedly declined by 0.2% October compared with the same month a year earlier, versus the 0.0% in the previous month. Experts had expected a 0.1% fall. 
  • Deflation in China suggests signs the economy is cooling. Normally this would have a negative knock-on effect on NZD. 
  • The Kiwi itself weakened on the back of an inflation report from the RBNZ on Wednesday. The report showed both one-year-out and two-years-out inflation expectations for New Zealand fell in Q3 compared to the previous quarter.
  • Actual inflation in New Zealand, as reported by Stats NZ, also showed a drop in inflation to 5.6% in Q3 versus the 6.0% of the previous quarter. 
  • The lower inflation expectations imply the RBNZ is less likely to raise interest rates. Since higher interest rates tend to strengthen a currency by increasing capital inflows from foreign investors searching for higher returns, the lower data weighed on the Kiwi. 
  • The widespread market view is that the US Federal Reserve (Fed) is now unlikely to raise interest rates further. However, recent commentary from Fed officials has suggested some still see the need for more interest rate hikes, muddying the picture. 
  • With the Fed Funds Rate currently at 5.25%-5.50%, there is little incentive for traders to borrow in either NZD or USD and invest in the other, an operation known as the “carry trade”, that is a major contributor to fluctuating global FX demand.
  • US Initial Jobless Claims (Nov 3) came out slightly below expectations at 217K, versus estimates of 218K and 220K previously. Continuing Jobless Claims (Oct 27), rose to 1.835M when 1.820M had been expected from 1.812M previously.  
  • A speech from Federal Reserve Chair Jerome Powell scheduled for 19:00 GMT could impact the NZD/USD, on Thursday. 

New Zealand Dollar technical analysis: NZD/USD bounces of 50-day SMA

NZD/USD – the number of US Dollars one New Zealand Dollar can buy – bounces off the key 50-day SMA and rises 0.35% at the time of writing on Thursday, to trade at 0.5929. 

At the same level as the 50-day sits the 0.382 Fibonacci retracement of the rally from off the late October year-to-date lows, further reinforcing its role as springboard.   

New Zealand Dollar vs US Dollar: Daily Chart

The trend is bullish in the short term and a decisive break above the November 3 high at 0.6001 would reconfirm this bullish bias, with a likely target thereafter at the 0.6055 October high.  

However, the medium and long-term trends are still bearish, suggesting the potential for more downside is strong. 

New Zealand Dollar vs US Dollar: Daily Chart

A break below 0.5884 would signal a continuation of the broader downtrend to a target at the 0.5773 October low. 

Bulls would have to push above the 0.6055 October high to change the outlook in the medium term and suggest the possibility of the birth of a new uptrend.

RBNZ FAQs

The Reserve Bank of New Zealand (RBNZ) is the country’s central bank. Its economic objectives are achieving and maintaining price stability – achieved when inflation, measured by the Consumer Price Index (CPI), falls within the band of between 1% and 3% – and supporting maximum sustainable employment.

The Reserve Bank of New Zealand’s (RBNZ) Monetary Policy Committee (MPC) decides the appropriate level of the Official Cash Rate (OCR) according to its objectives. When inflation is above target, the bank will attempt to tame it by raising its key OCR, making it more expensive for households and businesses to borrow money and thus cooling the economy. Higher interest rates are generally positive for the New Zealand Dollar (NZD) as they lead to higher yields, making the country a more attractive place for investors. On the contrary, lower interest rates tend to weaken NZD.

Employment is important for the Reserve Bank of New Zealand (RBNZ) because a tight labor market can fuel inflation. The RBNZ’s goal of “maximum sustainable employment” is defined as the highest use of labor resources that can be sustained over time without creating an acceleration in inflation. “When employment is at its maximum sustainable level, there will be low and stable inflation. However, if employment is above the maximum sustainable level for too long, it will eventually cause prices to rise more and more quickly, requiring the MPC to raise interest rates to keep inflation under control,” the bank says.

In extreme situations, the Reserve Bank of New Zealand (RBNZ) can enact a monetary policy tool called Quantitative Easing. QE is the process by which the RBNZ prints local currency and uses it to buy assets – usually government or corporate bonds – from banks and other financial institutions with the aim to increase the domestic money supply and spur economic activity. QE usually results in a weaker New Zealand Dollar (NZD). QE is a last resort when simply lowering interest rates is unlikely to achieve the objectives of the central bank. The RBNZ used it during the Covid-19 pandemic.

Source: https://www.fxstreet.com/news/new-zealand-dollar-bounces-off-50-day-moving-average-202311091151