Sage Investment Club

When Liz Truss resigned as PM of Great Britain, the pound soared suddenly. The NZ dollar remains stable, though. The different reaction of the two currencies points to different circumstances. Let’s discuss politics, economies, and “foreign winds” and make a trading plan for the NZDUSD.

Monthly fundamental forecast for the NZ dollar

To be a PM, you need to have “enough gas in the tank” and even more gas for force majeure circumstances. Jacinda Ardern’s resignation as PM was like a bolt from the blue. Although her Labor Party’s rating fell to 33%, five pct lower than the main competitors’ — the National Party — many still believed the native of Hamilton and the Labourists would celebrate a victory in October. Now plans require a revision. Political turmoil is usually unpleasant news for a currency, so the NZDUSD‘s stability can be put “on the credit side.”

Jacinda Ardern once became the youngest female head of government in a developed country and won a brilliant victory in new elections after successfully battling the COVID-19 pandemic. However, economic problems undermined her authority. A fight with inflation forced the Reserve Bank to start the most aggressive monetary restriction cycle in a few decades: it raised the cash rate to 4.25% and signaled a further rise to 5.5%.

NZ inflation and RBNZ rate


Source: Trading Economics.

The NZ economy now feels the implications of the NZRB’s resolution. After housing prices grew almost 30% in 2021, they have been falling more rapidly than in Canada, Great Britain, or the USA, as they’re driven by high mortgage rates. Homeowners have been delivered a one-two punch, while the real estate sector is in a recession that risks spreading over the whole economy. The Reserve Bank forecasts the recession won’t be deep and long, but investors feel skeptical.

Even more so because the manufacturing sector’s business activity has dropped below the critical level of 50 for three months in a row. At the same time, business sentiment fell to the lowest since the 1970-s. Seventy percent of companies expect the economic state to worsen in the 12 coming months. They worry about falling domestic demand and predict lower employment and investment as a result.

NZ business sentiment trends


Source: Bloomberg.

Such a background disputes that the cash rate will rise by 75 basis points, predicted by the derivatives market, at the first RBNZ meeting in 2023. The weak economy and political uncertainty, which may last until 7 February amid elections of a new Labor Party’s leader and Prime Minister, strengthen the risk of a smaller increase — +50 basis points — which is supposed to hold back the NZDUSD on paper.

Monthly trading plan for NZDUSD

Thus, the NZ dollar’s fight for leadership among top G10 performers looks even more surprising in those circumstances. It shares the 3d-4th place with the euro, only yielding to the British pound and the Australian dollar. The main drivers of the NZDUSD‘s rally are the Fed’s slower monetary restriction and the reopening of the Chinese economy. I suppose foreign factors will outweigh negative domestic factors, and the pair will rise to 0.66 and 0.678. My advice is to buy.

Price chart of NZDUSD in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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