Why is the Kiwi falling as New Zealand unemployment climbs to 5.7%?

Third-quarter employment in New Zealand declined 0.1%, missing the forecast for 0.4% growth.
At its lowest level since mid-October, NZD/USD is trading at the session trough.

NZD/USD is trading just below 0.5600 at its session low, having surrendered almost the entire advance from the 14 October low just above 0.5550. New Zealand’s third-quarter employment declined 0.1%, compared with expectations of a 0.4% increase and second-quarter growth of 0.5%. Meanwhile, the unemployment rate climbed to 5.7%, above the 5.5% forecast.

Quarterly growth in the Labour Cost Index slowed from 0.7% to 0.4%, undershooting the 0.5% forecast. With the participation rate dropping from 70.7% to 70.4%, unemployment increased even as fewer people sought work. Having kept its rate unchanged on 28 October despite expectations of a hike, the Reserve Bank of New Zealand (RBNZ) now faces a weaker case for raising rates following softer employment and wage growth.

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New Zealand Dollar: Common Questions

Which factors shape the New Zealand Dollar’s movements?

Widely traded by investors, the New Zealand Dollar (NZD) is also called the Kiwi. Although New Zealand’s economic health and central bank policy largely determine its value, several distinctive influences also affect the currency. China, New Zealand’s largest trading partner, is one such influence: developments in the Chinese economy tend to move the Kiwi. Weak Chinese economic news is likely to signal reduced demand for New Zealand’s exports, weighing on its economy and, in turn, its currency. Dairy prices are another important driver, given that dairy is New Zealand’s principal export industry. Higher prices lift export earnings, supporting both the economy and the NZD.

How does RBNZ policy affect the New Zealand Dollar?

Keeping inflation within a 1% to 3% range over the medium term, and close to the 2% midpoint, is the Reserve Bank of New Zealand’s (RBNZ) objective. It adjusts interest rates to a suitable level to achieve this goal. Excessively high inflation prompts the RBNZ to raise rates to temper economic activity. Higher rates also lift bond yields, making investment in the country more attractive and supporting the NZD. Rate cuts, by contrast, tend to put pressure on the currency. Another important influence on NZD/USD is the interest rate differential: the gap between actual or expected New Zealand rates and those set by the US Federal Reserve.

What do economic releases mean for the New Zealand Dollar?

The New Zealand Dollar’s (NZD) valuation can respond to domestic macroeconomic releases, which provide important evidence of the economy’s condition. Robust growth, low unemployment and strong confidence underpin a healthy economy and support the 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 readings, on the other hand, are likely to weigh on the NZD.

Why does wider risk appetite matter for the New Zealand Dollar?

Risk-on conditions generally support the New Zealand Dollar (NZD). When investors see broader market risks as limited and feel optimistic about growth, the outlook for commodities and so-called ‘commodity currencies’, including the Kiwi, tends to improve. During market disruption or economic uncertainty, however, investors typically move out of higher-risk assets into more stable safe havens, leaving the NZD prone to weakness.