NZD/USD bears attack 0.6100 at two-year low amid inflation/recession fears, RBNZ eyed

• NZD/USD stays depressed at the lowest levels since May 2020.
• Fears of higher inflation increase the odds of recession and underpin USD’s safe-haven demand.
• China’s covid woes, geopolitical/trade chatters also exert downside pressure on the pair.
• RBNZ is expected to lift interest rates by 0.50% on Wednesday, no major data/events appear interesting ahead of that.

NZD/USD struggles to defend the 0.6100 threshold, after refreshing the 26-month low as risk-aversion propelled the US dollar, amid early Tuesday morning in Asia. The Kiwi pair’s latest weakness could be linked to the market’s fears of recession and cautious mood ahead of Wednesday’s monetary policy decision of the Reserve Bank of New Zealand (RBNZ). It’s worth noting that hardships for China, the world’s biggest industrial player and New Zealand’s key customer, also drown the quote.

One-year US inflation expectations jumped to the record high of 6.8% in June, versus 6.6% prior, per the NY Fed’s survey of one-year-ahead consumer inflation expectations. The inflation expectations followed strong US employment data, published Friday, to underpin hopes of an aggressive Fed rate hike and fuelled concerns over the health of the US economy, as well as the global ones. That said, the latest US jobs report mentioned that the US Nonfarm Payrolls (NFP) rose by 372K for June, versus expected 268K and downward revised 384K prior. Further, the Unemployment Rate matched market expectations of reprinting 3.6% level. Further details suggest that the annual wage inflation, as measured by the Average Hourly Earnings, edged lower to 5.1% from 5.3% in May and the Labor Force Participation declined to 62.2% from 62.3.

It’s worth noting that Kansas City Federal Reserve President Esther George recently raised concerns over recession while saying, “Recession projections suggest to me that rapid rate hikes risk tightening faster than the economy and markets can adjust,” per Reuters.

Elsewhere, Shanghai’s first coronavirus Omicron sub-variant BA-5 case escalated virus woes after the dragon nation failed to sustain the unlock activities. It should be noted that firmer inflation data from the Asian major and doubts over Beijing’s GDP goal, as well as on the stimulus’ ability to renew optimism, exert additional downside pressure on the market sentiment.

Amid these plays, equities and US Treasury yields began the week on a back-foot while the yield curves kept signaling recession fears.

Considering these catalysts, analysts at the Australia and New Zealand Banking Group said, “We expect the RBNZ to be hawkish tomorrow (they can’t afford not to be), but in a world of dollar dominance that may not do a lot for the beleaguered Kiwi, especially amid NZ recession fears.”

Technical analysis

Oversold RSI (14) joins a one-month-old descending support line to restrict short-term NZD/USD declines around 0.6100. However, corrective pullback remains elusive unless crossing a downward sloping resistance line from June 16, close to 0.6215 by the press time.