New Zealand Dollar rises on positive risk tone

• The New Zealand Dollar rises on positive risk appetite. 
• Risky assets rise on hopes of central banks cutting interest rates. 
• The RBNZ has not committed to cutting rates, however, as inflation remains high despite slow growth.

The New Zealand Dollar (NZD) is trading higher in its most traded pairs on Tuesday as markets adopt a positive risk tone, benefiting commodity currencies like the New Zealand Dollar over safe havens. 

European Stocks are mostly higher on hopes it will not be long before the European Central Bank (ECB) cuts interest rates, thereby cheapening credit.

The German DAX, British FTSE 100, Italian IT40 and Spanish IBEX are all showing gains, with only the French CAC40 down, after data showed a wider-than-expected 5.5% French government budget deficit in 2023, according to data from the statistics office INSEE.

New Zealand Dollar suffers from negative fundamentals

Despite this recent uptick, the New Zealand Dollar is under pressure from bearish fundamentals. 

Recent data showed the New Zealand economy fell into a technical recession in the fourth quarter of 2024, whilst headline inflation remained relatively high at 4.7% during the same reporting period, even if it fell from the 5.6% recorded in Q3. 

Despite weak growth, the Reserve Bank of New Zealand (RBNZ) does not envision itself cutting interest rates due to high inflation. Elevated price growth is partly a result of structural issues such as a tight labor market, which in turn keeps wage inflation high. 

In a speech about monetary policy at a Chartered Accountants’ event on Tuesday, RBNZ Chief Economist Paul Conway reiterated the bank's core message that interest rates would have to remain high for some time yet in order to bring down inflation.

“Interest rates need to remain at a restrictive level for a sustained period of time to meet our inflation objective,” said the notes from the speech, repeating the RBNZ’s official line. 

 Technical Analysis: New Zealand Dollar pulls back in downtrend 

NZD/USD – the number of US Dollars one New Zealand Dollar can buy – continues pulling back within a short-term downtrend. 

The pair recently broke out of a Wedge pattern and is forecast to continue falling until it reaches the conservative target for the pattern. 

New Zealand Dollar versus US Dollar: 4-hour chart

According to technical analysis theory, the target lies at a distance equivalent to the height of the wedge extrapolated lower. In the case of NZD/USD it suggests more downside to a conservative target at 0.5964, the 0.618 Fibonacci ratio of the height of the pattern extrapolated from the breakout point lower. The full ratio (1.000) provides a further target at 0.5892. 

New Zealand Dollar versus US Dollar: Daily chart

Adding to the bearish outlook is the possible formation of an ABC pattern or Measured Move on the daily chart. 

If so, NZD/USD could be unfolding in the final wave C of the pattern, which could stretch to a long-term target at 0.5864, where wave C is equal to wave A.  

Only a break above the 0.6107 March 21 high would bring into doubt the bearish bias.