The New Zealand dollar is seeing red on Monday, as the US dollar has started the week with gains against the major currencies after a solid non-farm payrolls release on Friday. In the European session, NZD/USD is trading at 0.6142, down 0.76%.
RBNZ expected to deliver 50bp hike
The Reserve Bank of New Zealand will be in the spotlight this week. On Tuesday, the central bank is expected to release a Statement of Intent. The report will outline the central bank’s objectives over the next three years, and investors will be looking for insights regarding future monetary policy.
After the Statement of Intent, the RBNZ sets interest rates on Wednesday at its policy meeting. The RBNZ has pressed the pedal to the floor and is widely expected to deliver a third successive 50bp increase, which would bring the cash rate to 2.50%. As with the Fed and RBA, there are concerns that the aggressive rate-hike tightening will slow the economy to such an extent that the result will be a recession. The Bank has been in an aggressive mode in order in order to curb soaring inflation, which has climbed to 6.9%.
The central bank has set as its number one priority the curbing of inflation and inflation expectations, and while it would of course prefer to avoid a recession, it is unlikely to change course even if this is the price to pay. With a peak in inflation nowhere in sight, the RBNZ can be expected to remain hawkish until inflation is contained. Interest rates could hit 3% in August and rise as high as 4% if inflation does not ease lower.
Confidence indicators have been heading southward, raising concerns about the health of the economy. The NIEZR Business Confidence index fell ever deeper into negative territory last week, with a reading of -65 for Q2. Business confidence is currently at its lowest level since Q1 2020, at the start of the corona pandemic. Economic activity has been curtailed due to the acceleration of Covid cases, and businesses continue to struggle with cost pressures and higher interest rates. Earlier in July, ANZ Business Confidence in June, which fell to -62.6, down from -55.6 in May, marking a 12th straight decline and a near-record low.
Consumers are also feeling the bite of the cost of living crisis and higher interest rates have meant higher mortgage payments, leaving consumers with less disposable income and less confidence about their economic situation. The Westpac Consumer Confidence fell sharply to 78.7 in Q1, down from 92.1 in Q4 2021. If major economic indicators point to a slowdown in growth, the RBNZ may have to ease up on its aggressive rate hiking.
- 0.6125 is under strong pressure in support. Below, there is support at 0.6062
- There is resistance at 0.6189 and 0.6252
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