New Zealand Dollar Lags on Economic Slump Fears

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The New Zealand Dollar is the day's biggest loser in the G10 currency space after a survey showed domestic business confidence and activity has slumped but inflation expectations remain elevated.

The Pound to New Zealand Dollar recovered by nearly half a per cent on the day to hit 2.11 after the ANZBO business confidence survey showed business confidence fell to 14.9 from 22.9 in April.

Expectations for own trading activity fell to 14.3 from 22.5 and business activity vs the same month one year ago slumped to -19.6 from -6.7.

"The latest business confidence survey did not make for happy reading," says Satish Ranchhod, Senior Economist at Westpac NZ. "In addition, the survey’s gauges of activity have also fallen. A net 20% of firms reported that their trading activity has declined over the past year."

But, worryingly, "weakness in activity isn’t translating into lower inflation pressures," notes Ranchod.

Inflation expectations are steady at 3.76%, and pricing intentions have actually risen to 46.9 from 45.1.

In short, the economy could use an interest rate cut but the Reserve Bank of New Zealand has its hands tied by inflation. This creates a potential stagflationary setup, which is never good for currencies.

"NZD/USD slipped back to 0.5950. New Zealand business confidence weakened appreciably in April," says Joseph Capurso, a strategist at CBA. "Pricing and cost expectations halted their decline with the risk they plateau at elevated levels. The elevated pricing expectations will greatly concern the RBNZ."

Elias Haddad, Senior Markets Strategist at BBH Currency says NZD is underperforming and NZ-US 10-year bond yield spreads narrowed.

"The sharp decline in New Zealand business confidence reinforces the case for RBNZ policy rate cuts later this year," he explains.

Typically, expectations for higher-for-longer rates can support a currency, but this assumption is questioned if there is a lack of convincing growth.

"With lingering cost pressure and softening demand, business continue to report a squeeze on profitability," says Ranchod. "Overall, today’s survey supports our expectations for soft activity through the middle part of this year, along with only a gradual easing in inflation pressures."