The New Zealand Dollar to US Dollar (NZD/USD) exchange rate fell during the North American session as demand for the ‘Greenback’ surged following the release of better-than-forecast US growth data.
Given that the US economy was originally estimated to have contacted by -2.9% in the first quarter of year, the majority of economists were expecting the world’s largest superpower to stage an impressive comeback in the second quarter – and they weren’t disappointed.
Although annualised expansion of 3.0% had been envisaged, the US economy actually grew by 4.0% in Q2.
According to economist Stuart Hoffman, the first quarter should be considered ‘an anomaly and growth will be much stronger through the rest of this year. Consumers are spending thanks to job and income gains, and with borrowing costs still low businesses are investing to meet stronger demand.’
As the data upped the odds of the Federal Reserve bringing forward the timeline for starting a cycle of interest rate increases, the appeal of higher-risk currencies like the ‘Kiwi’ dropped sharply.
The New Zealand Dollar to US Dollar (NZD/USD) exchange rate hit a low of 0.8461.
The Australian Dollar also lost ground against its US counterpart, as did the Euro and Pound.
The ‘Kiwi’ continued trending in a weaker position against the US Dollar even after the Federal Open Market Committee delivered its interest rate decision and policy statement.
As forecast by industry experts, the Fed opted to taper the level of bond buying by a further 10 billion US Dollars and left interest rates unaltered. The Fed is on track to finish tapering stimulus in October.
However, while some industry experts had been hoping that Federal Reserve Chairwoman Janet Yellen would offer up a more hawkish fiscal policy stance, the central bank chief merely reiterated that interest rates would remain at record lows for some time after bond purchases have been tapered out.
The FOMC also indicated that while recent US data has signalled strength in the domestic labour market, there is still considerable slack.
In a statement the FOMC observed; ‘A range of labour-market indicators suggests that there remains significant underutilization of labour resources’. However, the policy committee did acknowledge; ‘The Committee sees the risks to the outlook for economic activity and the labour market as nearly balanced and judges that the likelihood of inflation running persistently below two percent has diminished somewhat.’
As the announcement undermined expectations for an imminent interest rate hike, the US Dollar shed some of its earlier gains and the New Zealand Dollar to US Dollar exchange rate moved to trend in the region of 0.8488.
New Zealand Dollar to US Dollar Exchange Rate Forecast
With no economic reports for New Zealand on the horizon, we forecast that the New Zealand Dollar to US Dollar (NZD/USD) exchange rate will maintain its bearish outlook until the publication of US Continuing Claims and Initial Jobless Claims figures.
Before the weekend further fluctuations in the NZD/USD pairing could be caused by China’s Manufacturing PMI and the US Non-Farm Payrolls report. Signs of erosion in the slack in the US labour market would be US Dollar supportive.
UPDATED 10:25 GMT 31 July, 2014
NZD/USD Recovers Ground
After slumping to a low of 0.8477 the New Zealand Dollar managed to recover some ground on Thursday as investors chose to dwell on the more dovish aspects of the Federal Open Market Committee policy statement.
The fact that one member of the committee voted in favour of hiking rates was ‘Greenback’ supportive, but Yellen resolutely reasserted that interest rates would be on hold for some time to come.
The ‘Kiwi’ briefly achieved a high of 0.8518 as bets regarding Fed rate hikes fluctuated.
The New Zealand Dollar to Pound Sterling (NZD/GBP) exchange rate also strengthened as the Pound eased lower in response to unimpressive UK Consumer Confidence and House Price data.
The New Zealand Dollar to US Dollar (NZD/USD) exchange rate is currently trading in the region of 0.8491. However, if today’s US Initial Jobless and Continuing Claims figures impress the ‘Kiwi’ could falter before the close of trade.
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