NZ dollar dips as Manufacturing PMI contracts

The New Zealand dollar is lower on Friday. NZD/USD is down 0.31% on the day, trading at 0.6015 in the European session at the time of writing.

New Zealand manufacturing has been in a prolonged slump and the April Manufacturing PMI remained in contraction, with a reading of 48.9, up from 47.1 in March. The manufacturing sector has been mired in contraction territory for 14 straight months (the 50 level separates contraction from expansion) New Zealand’s economy remains weak and this has resulted in decreased demand which has dampened manufacturing activity.

The weak manufacturing PMI report is reflective of a weak economy that is struggling under the weight of elevated interest rate levels. The Reserve Bank of Zealand hasn’t veered from its “higher for longer” rate policy, as lowering inflation to the 2% target remains the central bank’s priority.

The RBNZ’s steep rate-tightening cycle has pushed inflation down to 4% but that is still above the upper band of the 1-3% target range. As other central banks have discovered, inflation may have tumbled from its peak but the final phase of restoring it back to the target range has proven elusive, even with rates in restrictive territory. RNBZ policy makers are hesitant to lower rates until they are confident that inflation will remain sustained around the 1-3% target range and clearly there is some distance to go before that happens.

The Organization for Economic Cooperation and Development (OECD) echoed this stance earlier in the week, stating that New Zealand’s inflation is “likely to be persistent” and urged the RBNZ not to lower rates until there was “clear evidence that inflation will fall to the middle of the RBNZ’s target range”.

The RBNZ meets next on May 22^n.d and is expected to hold rates. There is only one key release ahead of the meeting, Inflation Expectations, which has been steadily dropping and fell to 2.5% in Q4 2023. Another deceleration in the first quarter would indicate that inflation is dropping and could raise expectations of a rate cut in the second half of the year.

NZD/USD Technical

• NZD/USD has pushed below support at 0.6021 and is putting pressure on support at 0.6006
• 0.6049 and 0.6064 are the next resistance lines

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