Unlike the Fed, which expects a soft landing, the Reserve Bank of New Zealand is forecasting a recession. The RBNZ has finished monetary tightening, and the Fed can still raise the rate. What does it say? Let us discuss the Forex outlook and make up an NZDUSD trading plan.
Monthly New Zealand dollar fundamental forecast
When global inflation slows down, it doesn’t matter how high you raised rates or how aggressively you did it. It is important when you put an end. By closing the door on further tightening of monetary policy after raising the cash rate to 5.5%, the Reserve Bank of New Zealand has pressed down the kiwi. The NZDUSD at the moment sank by 1.5%, and it can well continue falling in value.
The 12th consecutive RBNZ monetary restriction was predicted by 21 out of 25 Reuters experts and did not come as a surprise to investors. The RBNZ has remained singularly focused on curbing inflation, lifting rates by 525 basis points since October 2021. This has been its most aggressive policy tightening streak since the official cash rate was introduced in 1999. Wellington acted faster than Washington, but this did not help the New Zealand dollar. After an impressive start in 2022, the лiwi lost about 6% of its value from its February highs. The end of the monetary restriction cycle and the recession predicted by the Reserve Bank make the outlook for NZDUSD bearish.
RBNZ forecasts for New Zealand
Source: Bloomberg
However, the RBNZ forecasts in May look far more positive than those in February. The opinion of the central bank was influenced by the forecasts of the government, which does not see a decline in GDP at all. The Treasury believes disaster recovery, booming tourism, and a less restrictive fiscal policy will provide more support to the economy than anticipated. However, officials note that growth remains sluggish, and the labor market is deteriorating.
New Zealand government forecasts for GDP
Source: Bloomberg
It seems that the central bank is bringing estimates in line with reality. Markets are more concerned about its forecast of a peak cash rate at the current level and the unwillingness to change it until mid-2024. Bloomberg experts disagree with this decision. They believe that the effects of monetary tightening will force the RBNZ to cut rates as early as 2023. A dovish shift is a bearish factor for NZDUSD.
Furthermore, investors are gradually losing their illusions about the Fed’s transition to monetary stimulus. The probability of growth in the federal funds rate in June is estimated by derivatives at 37% and in July – at 49%. Monetary policy divergence will support the NZDUSD bears.
Another reason for the kiwi’s downtrend is that China’s economy is recovering slower than expected. Citigroup warned of a “confidence trap”, while Oxford Economics writes of an economy “hitting the great wall.”However, things may change in the second half of 2023. If Asia’s leading economy gains momentum, the kiwi will resume an uptrend.
Monthly NZDUSD trading plan
After all, the forecasts remain a hypothesis, while the NZDUSD downtrend continues due to divergence in the monetary policy of the RBNZ and the Fed, as well as the growth gap between the two economies. I recommend selling the NZDUSD with targets at 0.6 and 0.59.
Price chart of NZDUSD in real time mode
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