Insights 
VT 
NZD/USD trades near 0.5894 at the beginning of the American trading hours on Friday. Domestic data and rising inflation expectations are supporting the pair after a two-day drop.
New Zealand’s Business NZ PMI increased to 53.9 in April from 53.2. Businesses expect inflation to average 2.29% over the next two years, a rise from 2.06% in the previous quarter.
The Reserve Bank’s Dilemma
The Reserve Bank of New Zealand (RBNZ) is expected to cut rates by 25 basis points, but rising inflation expectations may lead to caution. US Dollar Index (DXY) remains flat around 100.30 as US-China tensions ease and the Federal Reserve considers future rate cuts.
US economic data indicates a slowdown, with weaker-than-expected Housing Starts, Building Permits, CPI, and PPI. Retail sales were also below forecast, increasing the likelihood of two Fed rate cuts this year.
University of Michigan’s Consumer Sentiment for May dropped sharply, suggesting concern among US households. The focus will turn to upcoming New Zealand economic data releases, starting with the Producer Price Index (PPI).
RBNZ’s goals include price stability and maximum sustainable employment, adjusting the Official Cash Rate (OCR) as necessary. In extreme cases, the bank may use Quantitative Easing to stimulate the economy, potentially weakening the NZD.
Current Market Sentiment
The NZD/USD hovers just below 0.5900 as demand for the kiwi steadies following earlier losses. Supporting this move is a modest but clear improvement in domestic metrics, with April’s Business NZ PMI ticking up slightly above prior levels. While the increase from 53.2 to 53.9 isn’t a game-changer on its own, it adds to the sense that business activity in New Zealand holds up reasonably well, even in a challenging global environment.
What catches the eye more here, though, is the shift in inflation expectations. According to the latest surveys, those surveyed now anticipate inflation to sit closer to 2.29% over the next two years. That number’s a fair bit higher than three months ago, when it appeared more muted at 2.06%. This pushes the Reserve Bank into a less comfortable position—its target band remains the same, but market watchers had been lining up expectations for a 25 basis point rate cut. That move, once taken for granted, may not look as straightforward now. They might opt to wait longer, analysing more data before risking a cut with price pressure showing resilience. That’s particularly relevant now, given that any easing too soon might fuel further pricing risk.
Across the Pacific, the greenback isn’t offering strong opposition. With the Dollar Index stagnant around 100.30, we’ve seen little movement despite headlines calming around US-China relations. That doesn’t mean the story stops there. Instead, market participants are recalibrating expectations on what the Federal Reserve’s next steps might be, especially as an increasing portion of new data lends itself to a cooling economic picture.
US consumers spent less than expected last month, as seen in the Retail Sales miss, and the housing sector isn’t helping much either. New starts and permits both lagged forecasts. Add to this the latest inflation prints—softer than hoped on both the consumer and producer side—and suddenly talk of two rate reductions this year doesn’t sound far-fetched. Meanwhile, consumer confidence continues its downward trend, with the University of Michigan’s indicator showing a notable fall in sentiment in early May.
The next driver for price movement may come from New Zealand’s Producer Price Index. If production costs shift meaningfully, it could either reinforce or challenge expectations around inflation persistence. One outcome could offer support to the New Zealand dollar, while deviation the other way might revive interest in carry trades or shift flows elsewhere.
We are keeping an eye on how the central bank balances its dual mandate—managing inflation while maintaining employment. Its actions, whether via the adjustment of the Official Cash Rate or by implementing less conventional measures such as large-scale asset purchases, are likely to remain measured and reactive to data rather than driven by pre-set timetables. This makes it especially important to dissect upcoming domestic economic figures in detail, as these will inform whether current support for the currency can stretch much further or get pulled back again.
For now, positions that are sensitive to volatility spikes and shifts in rate expectations merit diligent monitoring. Certain levels in the spot price may come into focus again if policy tone changes or inflation data surprises, which would once more shift momentum in a way that can be used tactically.
