NZD/USD analysis amid potential Fed and RBNZ divergence
The NZD/USD exchange rate continued its freefall this week and reached its lowest level since 2022. The kiwi plunged to a low of 0.5600, down by about 12% from its highest level this year, after the latest New Zealand data.
Hopes of more RBNZ cuts rise
The NZD/USD pair has been in a strong bearish trend in the past few months as the US dollar index continued.
This sell-off accelerated this week as odds of more divergence between the Federal Reserve and the Reserve Bank of New Zealand (RBNZ) continued.
The RBNZ delivered another jumbo interest rate cuts this month, when it slashed its lending rate from 4.75% to 4.25%. This was the third interest rate cut that has seen them move from the year-to-date high of 5.25%.
The bank justified the cuts to the need to support an economy that has been ailing for a while in the past few years.
Odds of more RBNZ cuts rose after the statistics agency published weak economic numbers on Thursday.
The report showed that the economy has moved into a technical recession in the third quarter. It contracted by 1.0% in Q3 after contracting by 1.1% in the previous quarter. That contraction was much deeper than the median estimate of 0.2%.
The economy contracted by 1.5% on a YoY basis, also much lower than the median estimate of minus 0.4%. It had contracted by 0.5% in the previous quarter.
This contraction happened because of the relatively weak consumer spending and business investments. It was partially offset by the rising government spending in the country.
More data released on Friday showed that New Zealand’s trade numbers were not all that good. Imports dropped to N$6.92 billion, while exports rose to $6.48 billion. That left the country with a trade deficit of over $437 million.
Odds of more RBNZ cuts have also increased because of the falling inflation. The most recent data showed that the headline Consumer Price Index (CPI) dropped to 2.2% in Q3, the lowest level in years. It has dropped from the post-pandemic high of over 7%.
Central banks usually cut interest rates when inflation is falling in a bid to stimulate growth in the economy.
Fed divergence
The NZD/USD pair plunged as the hopes of a potential divergence between the Fed and the RBNZ continued. The Fed decided to slash interest rates by 0.25% on Wednesday.
At the same time, officials expect to deliver just two cuts in 2025, much lower than what analysts were expecting. Fed officials had also hinted at four rate cuts in 2025.
Therefore, if the Fed lives up to the guidance, it means that rates will end the year between 3.50% and 3.75%.
In contrast, the RBNZ will continue cutting rates further in 2025 to support the ailing economy. Currencies often crash when there is a divergence between the local central bank and the Federal Reserve.
NZD/USD technical analysis
NZD/USD chart by TradingView
The daily chart shows that the NZD/USD exchange rate has been in a strong downward trend in the past few months. It has now slipped below the key support at 0.5852, its lowest point in April and August this year.
The pair has also moved below the key support at 0.5775, its lowest swing in October 2023. It has also moved below the 50-day and 200-day moving averages, while the MACD and the Relative Strength Index (RSI) tilted downwards.
Therefore, the pair will likely continue falling as sellers target the next key support level at 0.5515, its lowest level in October 2022.
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