NZDUSD Outlook: Kiwi Slides As the US Forecasts Positive Construction Data

Jul 20, 2021 04:47 PM ET
NZDUSD Outlook: Kiwi Slides As the US Forecasts Positive Construction Data
  • New Zealand's annual inflation rate is at 3.3%, beating estimates at 2.7%. 
  • Construction costs in NZ have risen 4.6% (QoQ) in June 2021, with the annual costs showing a 7.4% surge. 
  • Consensus estimates expect US building permits for June 2021 to rise 1.01% to 1.700 million from 1.683 million.

The NZDUSD pair fell 1.04% as of 1:50 pm on July 19, 2021, from the previous day's close. It had opened at 0.7011 before falling to a low of 0.6922. The New Zealand dollar has struggled to stabilize against the US dollar, maintaining a 6.51% lead in the 1-year change. 

The Reserve Bank of New Zealand (RBNZ) indicated that while it will leave unchanged the financing for NZ's lending program (FLP), it will stop additional LSAP by July 23, 2021. Monetary stimulus is still needed to help the RBNZ to maintain inflation above the 2% target point. The CPI currently stands at 3.3%, with the LSAP at NZ$100 billion. 

Inflation pressure

New Zealand’s annual inflation rate at 3.3% puts CPI at the highest rise in a decade. 

New Zealand annual CPI

New Zealand annual CPI

This rate beat consensus estimates at 2.7%, indicating a steep rise in consumption levels after the ease of Covid-19 restrictions. The CPI rose 1.3% in June 2021 (QoQ), beating estimates at 0.7%.  The quarterly inflation increase was driven by high prices of second-hand cars, house building prices, and fuel. 

Border closure effect 

The New Zealand government’s decision to shut borders in a bid to curb the spread of Covid-19 may have worked to reduce the infection rate, but it has hurt the overseas workers’ dependent economy. Restaurants in the hospitality sector are facing an employee shortage. Lobby groups are holding protests to compel the government to ease visa rules for foreign workers. 

In response, New Zealand introduced a workers’ scheme. This plan has enabled about 17,000 skilled personnel to acquire visas and enter the country to support business growth through the pandemic. The quarter ending June 2021 saw more than 31,000 NZ citizens have their work-ready benefits withdrawn.  

The number of those receiving work-ready benefits has declined 10% from 123,963 in June 2020 to 110,790 in June 2021. However, Q2 2021 has seen New Zealand employers face difficulty in locating skilled and unskilled labor. The employment levels have reduced since 2.24 million jobs were filled in April 2021. 

US residential constructions 

The US Census Bureau is expected to release data on monthly residential constructions on July 20, 2021, for June 2021 (MoM). As of May 2021, a total of 1,681,000 building permits were issued on May 2021, with the housing starts at 1,572,000. 

US Residential Constructions

US Residential Constructions

Consensus estimates expect building permits for June 2021 to rise 1.01% to 1.700 million from 1.683 million. This anticipated increase will give the US dollar an edge over the New Zealand dollar. 

NZ has seen an increase in construction costs, with the June 2021 quarter experiencing a 4.6% surge. This rise is the highest since 1987. In the 12 months leading to June 2021, construction costs rose 7.4%. 

Quarterly construction costs in NZ

Quarterly construction costs in NZ

These high costs have been blamed on supply disruptions caused by Covid-19. However, New Zealand’s housing market is still short of 67,000 houses (in comparison with the population pressure) with the balance expected to be cleared in about three years. 

Technical analysis  

The NZDUSD pair formed a descending wedge, starting from June 18, 2021. We expect a short-term bearish continuation in response to the formation. The price movement may cross the prior support zone and move lower towards 0.6911.   

NZDUSD chart

Low selling volume indicates the possibility of buyers entering the market. The 14-day RSI also shows a bearish momentum, testing the oversold area.

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