What Is Driving NZDUSD Price Action?

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The New Zealand Dollar has moved into the spotlight over recent weeks in light of explosive gains against the US Dollar, but has since suffered a retracement lower, leaving traders wondering – Where is price headed next?

Six Years Without Recession

The gains are of little surprise considering the positive momentum of the New Zealand economy over recent years. It’s now been over six years since the country suffered a recession with the last episode largely due to the Darfield earthquake. Aside from that, the last Kiwi recession was during the 2008/2009 Global Financial Crisis. This is a significant amount of time to be in economic expansion and looks set to continue. The RBNZ remain adamant that they are not going to move on rates until late 2019/early 2020, which is supportive of further growth in the economy. The factors expected to drive growth in the economy are

  • Tourism
  • Construction
  • Accommodative interest rates
  • Population growth

Typically, recessions in New Zealand come as a result of three factors:

  •  An international shock
  • A drought
  • A sharp tightening in monetary policy

International shocks are clearly difficult to anticipate, however, risks in the current environment appear skewed to the upside with global growth picking up and inflation starting to track higher.

In terms of risks to the outlook, the factors which could cause a variation in quarterly numbers are

  • The potential impact of the Masters games
  • The Lions tour (expecting an upwards spike followed by a correction
  • The impact of tax cuts and benefit changes on consumer spending
  • Adverse weather issues

Economy To Remain Supported

The combined strength in both residential investment and household spending is likely to remain supportive of domestic demand and keep the expansion fuelled while net exports contribute less and less. Growth in export volume is expected to remain around average levels, aside from any acute weather incidents, but domestic demand is forecast to drive imports higher.  Furthermore, export prices rising faster than import prices will have a positive effect on domestic incomes, further fuelling the rise in domestic demand.

Alongside these factors, stronger employment growth, higher farm incomes, fiscal easing and growth in real wages are expected to boost private consumption over the next two years though the likelihood of population growth moderating, alongside lower house prices is expected to have a dampening effect on spending growth.

In all, the New Zealand economy looks set to continue its positive trajectory, though of course there are some issues which present questions in the outlook. However, it is important to acknowledge that the broad strength in the economy is benefiting the government which in turn is allowing it to subsidise measures and actions beneficial to the future of the economy.

Technical Perspective

NZD has rallied strongly against the US Dollar since March this year  but recently failed at the 2016 high at .7487. A break back above this level brings the larger symmetry objective of  .8231 into focus (78.6% retracement from 2014 highs)/ With the 2017 lows providing the main support for the current range.

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