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Kiwi weakens as New Zealand unemployment climbs to 5.7%
- New Zealand Employment Contracts 0.1% in Third Quarter, Missing 0.4% Growth Forecast
- At its weakest level since mid-October, NZD/USD is at the session’s low.
A 0.1% contraction in New Zealand’s third-quarter employment contrasted with expectations of a 0.4% increase and followed second-quarter growth of 0.5%. Unemployment climbed to 5.7%, above the 5.5% forecast. Trading just below 0.5600 at its session low, NZD/USD has surrendered almost the entire advance from its 14 October trough just above 0.5550.
Quarterly growth in the Labour Cost Index eased from 0.7% to 0.4%, undershooting the 0.5% forecast. Meanwhile, the participation rate slipped from 70.7% to 70.4%, meaning unemployment increased even as fewer people sought work. Having left its rate unchanged on 28 October despite expectations of a rise, the Reserve Bank of New Zealand (RBNZ) now faces a weaker case for an increase following the deterioration in employment and slower wage growth.
NZD/USD: 5-minute price chart
New Zealand Dollar: Key Questions Answered
The health of New Zealand’s economy and its central bank’s policy largely determine the value of the New Zealand Dollar (NZD), widely known among currency investors as the Kiwi. Several more specific influences also shape its movements. As China is New Zealand’s largest trading partner, developments in the Chinese economy tend to affect the Kiwi. Negative Chinese economic news is likely to imply lower demand for New Zealand’s exports, weighing on its economy and, in turn, its currency. Dairy prices are another important influence, given the industry’s position as New Zealand’s leading export sector. Higher dairy prices lift export earnings, supporting both the economy and NZD.
Keeping inflation within a 1% to 3% range over the medium term, with an emphasis on the 2% midpoint, is the Reserve Bank of New Zealand’s (RBNZ) objective. The bank sets interest rates at a level intended to achieve this. If inflation becomes too high, the RBNZ raises rates to restrain economic activity. Higher rates also lift bond yields, making investment in New Zealand more attractive and thereby supporting NZD. Rate reductions, by contrast, generally weaken the currency. NZD/USD can also be significantly influenced by the interest rate differential: the gap between actual or expected New Zealand rates and those set by the US Federal Reserve.
New Zealand’s macroeconomic releases provide an important gauge of economic conditions and can affect the valuation of the New Zealand Dollar (NZD). Robust growth, low unemployment and strong confidence underpin a healthy economy, which supports NZD. Strong economic growth draws foreign investment and, when accompanied by elevated inflation, may prompt the Reserve Bank of New Zealand to raise interest rates. Weak economic figures, on the other hand, are likely to weigh on NZD.
When investors see limited risks across markets and feel optimistic about growth, the resulting risk-on environment generally supports the New Zealand Dollar (NZD). Such conditions tend to improve the outlook for commodities and for ‘commodity currencies’ such as the Kiwi. During market turbulence or economic uncertainty, the reverse tends to occur: investors sell higher-risk assets in favour of more stable safe havens, and NZD typically weakens.
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