New Zealand Dollar Forecast: NZD/USD skates on thin ice as domestic data craters

NZD/USD Summary

In a week where the New Zealand economy is tipped to have grown solidly in the first three months of the year, more timely information suggests activity in Q2 is already falling off a cliff, raising questions about whether the Reserve Bank of New Zealand (RBNZ) may need to cut policy rates well into expansionary territory to prevent a triple-dip recession.

Triple-Dip Recession Incoming?

According to the latest BNZ manufacturing and services purchasing managers’ indices, the pessimistic views expressed were consistent with those seen during economic downturns in the past.

“The combined services and manufacturing data look nothing short of disastrous,” economists at BNZ wrote in the PSI report released on Monday. “If there was ever an argument for the provision of further stimulus from the central bank, then this is it.”

For those who don’t follow the New Zealand economy closely, getting timely and accurate information on how activity is evolving on the ground is extremely difficult, leaving private sector surveys as the closest thing markets can rely on for signal. Because of this, surveys such as those from BNZ can be influential, especially given they’ve demonstrated a reliable track record over decades.

Like similar surveys in other parts of the world, the BNZ PMI and PSI measure activity levels from one month to the next. A score of 50 indicates activity was unchanged, with a sub-50 score pointing to a decline in activity relative to a month earlier. The further away from 50, the greater the breadth of the decline.

Manufacturing Sector Sinks as Work Dries Up

Source: BNZ

One look at BNZ’s PMI reveals that after a promising start to the year for the manufacturing sector, things turned rapidly south in May, especially for new orders which contracted sharply—not a great sign for future activity. Nor was the single-largest monthly decline in the employment subindex in the more than two-decade history of the survey. The overall PMI skidded from 53.3 to 47.5.

Services Slump Adds to Economic Risks

Source: BNZ

The news was even worse for the far larger services sector, with the BNZ PSI sliding to 44.0—a reading consistent with recession. The deviation from the survey’s long-run average for sales and new orders is an alarming indicator of current and future demand, with both contracting sharply relative to April.

Later this week, Statistics New Zealand (StatsNZ) will belatedly release New Zealand’s Q1 GDP report, with growth expected to come in at 0.7%—the same level seen in Q4 2024 and above the 0.4% rate forecast by the RBNZ just a month ago. However, if the BNZ readings are replicated in other surveys over the coming months, it would suggest the recovery that saw markets pare back expectations for further rate cuts from the RBNZ later this year may have already run its course.

Markets See RBNZ Cash Rate Bottoming at 3%

Source: Bloomberg

For now, markets continue to see the cash rate bottoming at 3%, with only a small chance attached to policy rates being cut into expansionary territory below that level later in the year. Little chance is attached to the RBNZ cutting rates again when it next meets in early July, with a full 25bp move—taking the cash rate to 3%—not priced until November.

While that reflects RBNZ concerns towards a recent uptick in inflation expectations, if economic activity starts to nosedive again, the case for the RBNZ delivering a series of cuts will grow given the implications for wage and domestic inflationary pressures.

While domestic considerations may eventually impact NZD/USD direction, in the near term it’s all about geopolitics and broader investor risk appetite. As a small, open nation closely tied to the performance of the global economy, it’s no surprise the Kiwi dollar was among the worst performers on Friday—especially as a net energy importer. Outside the Federal Reserve rate decision on Wednesday, the path for NZD/USD this week will likely be heavily influenced by shifts in risk appetite.

NZD/USD Remains in Uptrend…For Now

Source: TradingView

Friday’s key bearish reversal candle warns of downside risk for NZD/USD, especially with momentum signals from RSI (14) and MACD shifting from bullish to neutral. However, after briefly testing channel support earlier in the Asian session, the pair has bounced as risk appetite has improved—underlining the key role it’s likely to play in determining direction this week.

Downside levels to watch include channel support just above .6000 today, with .5990 a minor horizontal support level below. Beyond that, the 50-day moving average and .5900 should also be on the radar.

On the topside, the Kiwi has struggled above .6050 recently, meaning a retest of the June 5 high at .6080 may prove tough going in the current environment. If breached, .6110 is a level that previously offered both support and resistance, making it one to watch.

-- Written by David Scutt

Follow David on Twitter @scutty