NZD/USD probes 21DMA in low-0.6400s before backing off as kiwi rides wave of buck weakness

• NZD/USD has pulled back below 0.6400 after earlier testing its 21DMA at 0.6430, but still trades substantially higher on-the-day.
• US dollar weakness after downbeat Philly Fed manufacturing data plus kiwi strength on hot PPI/positive OBEGAL revisions is helping.

NZD/USD rallied to test its 21-Day Moving Average around the 0.6430 mark on Thursday and printed near two-week highs in doing so, as the kiwi rode a wave of US dollar weakness. The buck saw some downside pressure in wake of a very weak US Philadelphia Fed Manufacturing survey for May, which sparked fresh fears about US economic weakness after downbeat Q1 earnings from major US retailers released earlier this weak triggered concerns about the health of the US consumer. At current levels in the 0.6380s, NZD/USD has pared its on-the-day gains to about 1.5%, with the pair trading about 2.5% above last week’s lows near 0.6200.

Further supporting the kiwi was a massive jump in the QoQ pace of Producer Price Inflation (PPI) according to a report released during Thursday’s Asia Pacific session. Producer input prices were up 3.6% in Q1, while output prices were up 2.6%, with the latest surge in price pressures interpreted by market participants as boosting the case for a second successive 50 bps rate hike from the RBNZ next week (rates are expected to be lifted to 2.0%).

“The RBNZ has accepted the logic that stronger action early on will reduce the need for an even more painful peak in rates in the future,” said analysts at Westpac. “We recently updated our forecasts to include four consecutive 50bp hikes in the (official cash rate) - at the May, July and August reviews, on top of the one in April”. That schedule of rate hikes should see the RBNZ maintain its substantial lead over the Fed when it comes to monetary tightening though, in recent weeks, this policy divergence has offered NZD/USD little by way of long-term support. The pair still trades over 9.0% below its early April highs above 0.7000.

Elsewhere and also perhaps lending the kiwi some support was the latest New Zealand budget announcement, which contained NZ$1B in giveaways to low- and middle-income households to help cope with the inflation surge. Importantly, New Zealand made positive revisions to its operating balance before gains and losses (OBEGAL) forecasts and now sees itself in budget surplus by 2024/25, with Finance Minister Grant Robertson expecting the economy to remain robust in the near term.