NZD/USD Treads Water after NZ Unemployment & Ahead of the US Fed

NZD/USD Analysis

Unemployment in New Zealand ticked up 3.4% in the fourth quarter of 2022, with NZD/USD reacting negatively initially. However, the rate remains close to historic lows, while wages increased 4.1% year-over-year - the biggest annual rise since 1992 when the series began ^[1]. Last week's data showed that headline CPI inflation stabilized at 7.2% in the same period, just off its three-decades high (7.3%) and the economy grew by very strong 6.4% y/y in the third quarter.

The Reserve Bank of New Zealand sees a short period of contraction as likely, but also expects inflation to peak higher, at 7.5% according to the November projections ^[2]. Officials had then raised rates by a historically large 75 basis points, bringing the Official Cash Rate to 4.25%. Despite prospects of an economic downturn, policy makers stayed on their hawkish path, raising their OCR projections, expecting interest rates to go as high as 5.5%.

All eyes are now on the US Fed, which is widely expected to downshift again, with an 0.25% rate increase. The bank has maintained its hawkish stance though and commitment to bring inflation down, while expecting median terminal rate of 5.1% - higher than market expectations.^[3]. It is quite likely that Chair Powell will stay the course and push back against optimism for a pivot and as such, the policy statement and the press conference will be closely watched.

The trajectory of NZD/USD will be determined by the Fed outcome, but form a technical prospective there is risk for a breach of the EMA200, as it faces difficulties this week. Daily closes below this level would bring last month's lows in the spotlight (0.6190), but the daily Ichimoku Cloud can provide support.

Despite recent weakness, NZD/USD comes from a strong month and above the EMA200, immediate bias is on the upside. As such, bulls can push for higher highs, but we are cautious at this stage for sustained advance past 0.6675.