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NZD/USD analysis: Here’s why the New Zealand dollar crashed

by admin December 31, 2024
December 31, 2024
NZD/USD analysis: Here’s why the New Zealand dollar crashed

The NZD/USD exchange rate is down for five consecutive weeks, moving to its lowest level since October 2022. It dropped to 0.6530, down by over 11% from its highest level in 2024 and by 24% from the pandemic high. 

RBNZ and Fed divergence

The New Zealand dollar has plunged as the country’s economy remains on edge. The most recent data showed that the economy moved into a recession in the third quarter as it contracted by 1%. This contraction was worse than the median estimate 0.2%.

New Zealand’s economy contracted by 1.1% in the second quarter. A technical recession is usually characterized by a slump that lasts for two consecutive quarters.

The government has blamed the Reserve Bank of New Zealand (RBNZ) for the ongoing weakness for maintaining higher interest rates for longer. Higher rates affected consumer and business spending by limiting their access to capital.

The RBNZ has insisted that higher rates were necessary to bring inflation down in the country, a point that can be justified. The statistics agency’s data showed that the headline Consumer Price Index (CPI) fell from 7.3% in 2022 to 2.2% in the last quarter. Inflation will soon move below the 2% target if this trend continues. 

New Zealand’s inflation may have fallen because of the Philips Curve. This theory states that a country’s inflation will fall when unemployment rises. In this case, the unemployment rate rose from 3.2% in 2022 to 4.8% in November.

Therefore, the RBNZ has responded to the new normal by slashing interest rates. It slashed rates by 50 basis points to 4.25% as analysts predict a mega 75 basis point cut in the next meeting in February. 

The challenge, however, is that more cuts will devalue the local currency, stimulating falling inflation. 

The NZD/USD pair has also retreated as the divergence between the Fed and the RBNZ continued. While the Fed has also slashed rates, it has hinted that the pace of these reductions will be more gradual in 2025. 

The pair’s crash also mirrors the performance of other currencies that have plunged against the US dollar. In Australia, the Aussie has dropped to 0.6200, its lowest level since October 2022. In Europe, the EUR/USD pair has plunged and is on a path towards parity.

The same trend is occurring in emerging markets, where key currencies like the Indian rupee, Brazilian real, and Turkish lira have reached all-time lows. 

The rising US bond yields will likely make the US dollar more attractive to investors compared to other currencies.

NZD/USD technical analysis

NZD/USD chart by TradingView

The weekly chart shows that the NZD/USD exchange rate continued its strong downtrend this wek. It has dropped in the last five consecutive weeks and moved below the key support level at 0.5776, its lowest swing on October 23rd. 

The NZD/USD pair has remained below the 50-week and 200-week exponential moving averages. Also, the Percentage Price Oscillator (PPO) has moved below the zero line, while the Relative Strength Index (RSI) is nearing the oversold level. It has also formed a double-top chart pattern around the resistance at 0.6375.

Therefore, the path of the least resistance for the pair is downwards, with the next point to the next point at 0.5517, its lowest swing in October 2022. 

The post NZD/USD analysis: Here’s why the New Zealand dollar crashed appeared first on Invezz

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