NZD Soars as US Growth Gains Momentum

The NZDUSD has increased by more than 6% since July, demonstrating five consecutive weekly higher highs amid monetary policy adjustments made by the Reserve Bank of New Zealand in an attempt to bring inflation below 3%. Conversely, the US Dollar Index bounced off the lows after four weekly consecutive lower lows and in particular after the recent revision showing that the US economy grew at a 3% annualized rate in Q2 2024, up from the previous 2.8% estimate, driven by stronger-than-expected consumer spending, which increased by 2.9%.

On August 14, the Reserve Bank of New Zealand lowered the Official Cash Rate (OCR) by 25 basis points down to 5.25%, expecting the annual inflation to decline to within the Monetary Policy Committee’s 1 to 3 percent target band in the September 2024 quarter and return sustainably to the 2 percent midpoint in the middle of next year.

The current inflation rate in New Zealand is 3.3%.

The Monetary Policy Committee (MPC) meets seven times annually to review the OCR, a key tool used to maintain price stability. The objective is to keep inflation within a target range of 1% to 3% over the medium term, with a focus on achieving the 2% midpoint. When inflation rises, the MPC can increase the OCR, which in turn raises interest rates to help bring inflation down.

In August 2024, New Zealand’s business confidence reached a decade high, with the ANZ Business Confidence Index soaring by 23 points to +51. This surge reflects a significant increase in expected own activity, which jumped to its highest level in seven years, alongside strong employment and investment intentions. However, despite this forward-looking optimism, past activity remains weak, particularly in the construction sector, where the contrast between future expectations and current performance is obvious.

Inflation expectations dipped below 3% for the first time since July 2021, signaling a positive shift, while pricing intentions rose, indicating that a significant portion of firms plan to raise prices in the coming months. Notably, this burst of confidence was already evident early in the month, before the Reserve Bank’s cut to the Official Cash Rate (OCR), suggesting that broader economic conditions and the anticipation of lower interest rates have fueled this optimism.

While the outlook is improving, the current state of business activity remains challenging, with sectors like construction and retail still facing difficulties. The results show a mixed but generally positive picture, with manufacturing leading in both confidence and activity. As New Zealand moves forward, the sustainability of this optimism will be crucial, particularly in how it influences actual business decisions and economic recovery. The Reserve Bank and market observers will be closely monitoring these trends to gauge the ongoing impact on the broader economy.

The US economy grew at a 3% annualized rate in Q2 2024, slightly higher than the initial estimate of 2.8%, due to stronger consumer spending. Personal spending increased by 2.9%, up from the previous 2.3% estimate. Gross domestic income (GDI) rose by 1.3%, matching the first-quarter gain. While growth has slowed compared to late 2023, the Federal Reserve is expected to lower interest rates soon, potentially aiding sectors like housing and manufacturing.

In the week ending August 24, 2024, US initial unemployment claims slightly decreased to 231,000, while the insured unemployment rate remained steady at 1.2%. The four-week moving average for claims also declined, reflecting a stable labor market. Despite some state-level variations, overall unemployment claims saw minimal changes, indicating continued stability in jobless benefits claims across the country.

In conclusion, both the New Zealand and US economies are navigating complex landscapes of monetary policy adjustments and shifting economic indicators. The Reserve Bank of New Zealand’s efforts to curb inflation have bolstered the NZD, while strong consumer spending has driven upward revisions in US GDP growth. However, underlying challenges in sectors like construction and retail in New Zealand and the potential for future interest rate changes in the US suggest that the path forward remains uncertain, with sustained vigilance required to maintain economic stability and growth.