Kiwi Dollar Could Go Up
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Back on track. New Zealand has suffered its fair share of the pandemic but they’re coming back with a bang. Their unemployment rate fell even more than forecast in the second quarter as the economy looks to get back to their pre-pandemic days with increased hiring leading to stoke wage inflation. The kiwi dollar rose as traders look forward to an increase in interest rates in two weeks’ time.

The jobless rate fell as far as 4% from the first quarter, as reported by Statistics New Zealand. Economists however expected it to be 4.4%. Employment in the whole country rose to 1% in the span of three months with the private sector recording the most increase in ordinary time wages since 13 years ago.

The economy may be overheating with the recent report from the labor market, which might lead to the Reserve Bank to start to raise the official cash rate to keep a lid on price pressures. Annual inflation increased to 3.3% in the second quarter, way past the central banks’ target range between 1-3%.

“Today’s figures underscore that the domestic economy is running hot, and no longer warrants the degree of monetary stimulus that’s currently in place,” said Michael Gordon, acting New Zealand chief economist at Westpac Banking Corp. in Auckland. The report “reinforces our forecast for an August OCR hike,” he said.

After the report, the kiwi dollar rose to 70.49 U.S cents at 11:20 a.m from 70.24 cents previously before it was released.

1% cash rate

Investors lifted bets on rate increases, with a quarter-point hike now fully priced in for the RBNZ’s next review. Economists at ASB Bank and Bank of New Zealand were hopeful that there will be three rate rises this year, totaling the cash rate to 1%.

“The data show the RBNZ is well behind the curve. Things are only going to get tighter,” said Stephen Toplis, head of research at BNZ in Wellington. “Is a 50-point hike possible in August? It’s not our central view but not a zero chance.”

The importance of RBNZ was once again highlighted, supporting maximum employment, stable inflation but have started to reduce monetary stimulus as of last month by ceasing quantitative easing since the economic outlook since late 2020 has fared better than anticipated.

Spending has recovered to above pre-pandemic levels and the monetary policy committee has reconsidered to return interest rates to more normal levels.

New Zealand is in the vanguard of developed-world central banks and is beginning to normalize policy and is set to become one of the first to raise rates even amidst the pandemic and South Korea has also signaled that it could lift borrowing costs this year.

Even so, the Federal Reserve has indicated that there is a way to go before it starts to scale back bond-buying, and Australia also iterated that it doesn’t expect to raise rates before 2024.

Employment rose to a third straight quarter after what seemed like a slump in mid-2020. Economists also forecasted 1.2% annual growth with participation rate going from 70.4% to 70.5% in the span of three months.

Statistics New Zealand said the underutilization rate has a broader gauge which includes employees seeking additional hours, from 12.1% in the first quarter going down to 10.5%.

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Source : TheEdgeMarkets