The New Zealand Dollar (NZD) is experiencing a downward trend, dropping below 0.5900 as China's economy slows in July. This decline is primarily attributed to weaker-than-expected Chinese Retail Sales and Industrial Production data, which have a significant impact on the China-proxy New Zealand Dollar (NZD) against the US Dollar (USD).
China's Retail Sales growth of 0.6% year-over-year (YoY) fell short of the estimated 1.5% and slowed from the previous month's 1.0% growth. Simultaneously, Industrial Production rose by 4.5% YoY in July, marking the first decrease in three months and missing expectations. These figures indicate a loss of momentum in China's economy, which has a substantial impact on New Zealand's exports and, consequently, its currency.
The Reserve Bank of New Zealand (RBNZ) is also playing a crucial role in the NZD's performance. The bank aims to maintain an inflation rate between 1% and 3%, with a focus on the 2% midpoint. When inflation is high, the RBNZ increases interest rates to cool the economy, which can make bond yields higher and attract investors, boosting the NZD. Conversely, lower interest rates tend to weaken the currency.
Additionally, the performance of the Chinese economy is a significant factor in the NZD's movement. As China is New Zealand's largest trading partner, any negative news about the Chinese economy can lead to a decrease in New Zealand's exports, impacting the economy and, subsequently, the currency. Another critical aspect is dairy prices, as the dairy industry is New Zealand's primary export. High dairy prices boost export income, positively influencing the economy and the NZD.
However, there are also factors that can support the NZD. Lower bets for a US Federal Reserve (Fed) rate hike could undermine the US Dollar (USD) and act as a tailwind for the NZD/USD pair. Markets are now pricing in a September quarter-point hike, with a near-65% chance of a hold, after softer consumer price inflation and weaker retail sales. This scenario could potentially weaken the USD and strengthen the NZD.
In terms of technical analysis, the NZD/USD pair holds a constructive bullish bias, with the spot remaining above the 100-day moving average and the Bollinger middle band. The pair is approaching the Bollinger upper band, which caps the immediate topside. The Relative Strength Index (14) is around 61, indicating bullish but not overbought territory, suggesting that buying pressure persists yet may slow as the price nears overhead supply.
On the downside, the Bollinger middle band at 0.5855 and the 100-day moving average at 0.5830 provide initial support. The Bollinger lower band near 0.5765 acts as a deeper cushion in case of a broader pullback. On the upside, a clear break above the Bollinger upper band at 0.5945 would open the door for an extension of the recovery, while failure to overcome this barrier would likely trigger consolidation or a corrective dip toward the support cluster.
In conclusion, the New Zealand Dollar (NZD) is experiencing a downward trend due to the slowing Chinese economy and the RBNZ's monetary policy. However, there are also factors that could support the NZD, such as lower bets for a US Federal Reserve rate hike and the technical analysis indicating a constructive bullish bias. Investors should carefully consider these factors when making investment decisions regarding the NZD.
