Fundamental Analysis: Some Gains for NZD on Better Data and Shares

Fundamental Analysis: Some Gains for NZD on Better Data and Shares

The New Zealand dollar has strengthened somewhat in today’s trading against most major currencies. NZD’s gains come in the wake of much better building data and a continuing upward movement for the NZX.

The Kiwi dollar reached up to around 68.5 US cents, recovering yesterday’s losses. Meanwhile NZD moved back up against the yen to around ¥76.40, only slightly below where it started the week. EURNZD also declined today to nearly NZ$1.665.

Support from shares and building, but business confidence wanes

Wednesday night’s release of the results from ANZ Bank’s New Zealand Business Outlook survey was negative for NZD. The figure of -31 is notably worse than January’s release. Around 65% of Kiwi businesses expecting deteriorating conditions is close to the 10-year record figure in August last year.

Weaker Chinese manufacturing is also somewhat negative for the Kiwi dollar because of the significant value of exports to China. Yesterday morning’s official Chinese manufacturing PMI came in at 49.2, indicating a larger contraction than expected. This is the third successive month of lower manufacturing activity in China. On the other hand, today’s Caixin PMI came out unexpectedly positive.

The most important data last night was building consents for January. The increase of 16.5% is more than triple the expectation. This was the main data-related factor behind NZD’s recovery in the Asian session today.

Beyond data, the bull run on Kiwi shares might have some strength left. This morning’s gain of around 0.3% in the S&P NZX 50 has pushed New Zealand’s share index back to its all-time record highs over 9,350.

The NZX also appreciated in yesterday’s session by about 0.5%. Air New Zealand’s weaker earnings report aside, over half the shares in the NZX made gains yesterday. There is a degree of positive correlation between the index and NZD mainly because demand for shares usually increases demand for currency to purchase them.

Little data next week and politics in view

Next week’s fairly sparse in terms of data from New Zealand. Tuesday’s tentative release of Global Dairy Trade’s price index might have some impact given the high importance of dairy exports in New Zealand’s economy. However, this figure itself is unlikely to bring much direction for the Kiwi dollar.

Traders might note developments in Kiwi politics next week, though. New Zealand’s Tax Working Group recommended last week that the country introduce a capital gains tax. The proposed tax could raise up to NZ$8 billion over the next five years, but the National Party and the co-governing New Zealand First both oppose such a measure. Possible instability in the coalition because of this issue could mean volatility for NZD.

Shares are an important factor. Even though new record highs are fairly unlikely for the NZX in the near future based on the technical picture, consolidation would be a factor in favor of the New Zealand dollar.

NZD’s advance likely to continue in the short term

Fundamentals in general suggest that the Kiwi dollar might make some more small gains into the start of next week. Even so, traders should be careful not to ignore the NZX. Monday’s session in the stock market could change the picture significantly for NZD.

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