NZ Dollar exchange rate fell this week as weak jobs data appeared to highlight cracks in the NZ labour market. The adverse data opened up the possibility that the Reserve Bank of New Zealand might be needing to cut interest rates.
The final quarter of 2018 showed unemployment increasing to 4.3%; way above market expectations which had factored a seasonal increase to reach 4.1%, prompting a quick sell of in the NZD.
The unemployment rate for men increased to 4.4% in Q4 2018, women faired slightly better with the unemployment rate for women rising to 4.2%. The lower unemployment rate for women being the first time since 2010 that women fared better than their male counterparts. The previous quarter faired slightly better with unemployment touching 4.0%, revised up from 3.9% highlighting a potentially worrying trend in the NZ labour market.
The nations employment also missed expectation growing just 0.1% against a forecast 0.3%. The participation rate fell slightly to 70.9%. Slightly more encouragingly wage growth grew to 1.9% up to December 2018. Wages in the private sector increased to 2.0% and the public sector growing by 1.7%.
The wage growth data led economists to the conclusion that wage increases currently find themselves in a slump, NZD inflation which increased by 0.1% in the final quarter of 2018 with year on year inflation touching 1.9% could therefore be eroded by modest wage growth and could lead the RBNZ to cut the official cash rate if the trends were to continue. Mid-January saw the chance of the RBNZ cutting interest rates sit at 40% in recent weeks this has crept up and its estimate to now sit at 42% probability.
The Australia New Zealand banking group predicted just a few weeks ago that the NZ Dollar would fall to a decade low against the USD in 2019. The banking group sighted rate cuts due to an increasingly slower economy and slipping inflation will is forecast to slump below the RBNZ’s target of 1%-3%.
The NZ economy progressed at the slowest rate for 3 years in Q4 2018 with annualised rate of growth falling from 3.2% to 2.6%, well short of the RBNZ’s.
The recent labour data will only further serve this rationale and the announcement saw the GBP/NZD flourish with the pair increasing from 1.8944 to 1.9188, the pair enjoyed further gains closing at 1.9189. The 2019 high for the pair touching 1.9396 when GBP rallied from soft Brexit rhetoric a few weeks ago.
Elsewhere the USD/NZD spiked from 1.4646 to 1.4758 rising comfortably over a cent. The Dollar gains have been sustained despite tepid ISM manufacturing data, with the USD almost certainly assisted by Trumps new willing to end the trade war.
The NZD was joined in its losses by the AUD as the RBA Governor Philip Lowe highlighted the chances of an interest rate cut and interest rate rise were now ‘’more evenly balanced’’.
A general risk of stance toward the AUD and NZD has seen both currencies declined coupled with slowing economies and China’s landscape, despite the potential of a trade deal with the US remaining uncertain.
The NZ Dollar’s issues have naturally been exasperated by the recent employment data and could be further supressed this week as moved to make its first rate decision since November. The Reserve Bank is predicted by markets to the its interest rate at 1.75%.
Governor Adrian Orr during his last rate decision in November stated that the RBNZ was not taking the possibility of rate cuts off the table and therefore markets could be surprised. Despite these comments and the recent slump in the NZ labour markets only envisage a rate cut before June 2019.
The USD could apply more influence on the Kiwi and Aussie Dollar exchange rates this week as Jerome Powell looks to update markets on US monetary and the slowing global economy. Despite this pressure the AUD and NZD may ease over the next seven days as much of the high impact data and sentiment has already considered by markets and therefore priced in. Development in the US China trade negotiations will almost certainly divert attention and slowdown the sell of AUD and NZD.