Home Forex Market Analysis The Kiwi on the Offensive as US Inflation Is Beginning to Worry...

The Kiwi on the Offensive as US Inflation Is Beginning to Worry Watchers

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The Kiwi on the Offensive as US Inflation Is Beginning to Worry Watchers
  • New Zealand’s unemployment rate for the quarter ended March dropped 0.6% on the back of a marked economic recovery.
  • The NZD/USD is riding on the news to advance against major rivals; it gained 0.39% against the greenback early Wednesday. 
  • US inflation is becoming a big issue, and Fed officials are hinting at an impending rate hike.

A New Zealand Health Ministry bulletin for May, Tuesday 4 reported zero new COVID-19 cases. Incredible as it seems – considering countries such as India are reporting thousands of new daily cases – the report is not an anomaly for the island nation. According to Johns Hopkins data, the 7-day average of new COVID-19 cases for New Zealand is just two as of May 3. 

New Zealand’s excellent handling of the pandemic has enabled its economy to crawl from under the weight of an impending recession. According to labor data released on Tuesday, the economy managed to cut the unemployment rate by 0.6% to 4.7% for the three months ended March 2021. Meanwhile, employers increased the number of workers on their payrolls by 67%. 

The upbeat data is great news for New Zealand, considering that most countries globally are expecting growth, but only a few have so far reported positive figures. Market sentiment seems to be riding the positive news in favor of the kiwi. The NZD/USD was up 0.41% in the last 24 hours of trading to 0.7170. 

Although the kiwi’s surge is remarkable, it lacks enough strength to push it out of one of the longest-running ranging markets. The NZD/USD price fluctuations remain within a tight range year-to-date. A 51.77 RSI (figure 1) does inject any hope concerning the pair’s next direction. However, a glance at the MACD shows the selling pressure is dying down. If the sellers do exit the NZD/USD market, we will likely see a break above 0.7269 support established on March 18, 2021.

NZD/USD 4-hour price chart

Figure 1: NZD/USD 4-hour price chart

Downbeat data and inflation fears dampening the greenback

The market was looking forward to a 1.3% rise in US factory orders for March, but the economy managed just 1.1%. Should the market be happy considering that February factory orders contracted by 0.5%? According to the US dollar index’s behavior, the market was neither happy nor spooked by the figures (DXY). On Tuesday (the day that the soft data came in), the DXY touched an intraday high of 91.28, far higher than the low of 90.42 recorded on Wednesday last week.

The market reaction might have spared the greenback after the factory orders data, but the same might not happen in the coming days. First, March data shows the US trade imbalance with major trading partners is surging. Against China, the US trade shortfall increased by 22% in March and 23.5% against Mexico. In total, the trade imbalance for March rose to $74.4 billion, a record number. 

At the same time, the market is on edge concerning the US inflation scenario. Janet Yellen, the US Treasury Secretary, stoked inflation fears on Tuesday after she raised the possibility of a rate hike in the US to contain inflation. Although Yellen clarified the comments before the end of the day, the market was already beginning to respond. 

By the close of trading on Tuesday, the greenback was low against all majors. Against the New Zealand dollar (NZD), the USD was down 0.26%, the EUR/USD was up 0.08%, the GBP/USD was up 0.18%, and the USD/JPY was down -0.05%. 

The simple moving average in the DXY chart below (figure 2) indicates trouble is just beginning for the US dollar. If the price breaks below the current 91.18 support level, there is a high likelihood that the currency will pare the gains earned over the past two weeks.

US dollar index 4-hour chart

Figure 2: US dollar index 4-hour chart 

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