NZD/USD, NZD/JPY Outlook: Risk sentiment, not RBNZ rate bets, driving Kiwi direction

• New Zealand employment growth missed forecasts in the March quarter
• Labour market slack remained elevated despite lower unemployment
• Markets priced a 38% chance of a RBNZ hike later this month
• Kiwi direction remains tied more to risk sentiment than rates

Summary

While New Zealand’s March quarter labour market report may dampen the case for aggressive near-term RBNZ tightening, it’s unlikely to be the primary driver for the Kiwi right now. Broader swings in risk appetite tied to developments in the Iran conflict and crude oil prices continue to dominate FX price action, leaving local rates expectations as a secondary consideration for traders.

Labour market slack still evident

New Zealand's labour market delivered a mixed bag relative to market expectations in the March quarter, with the surprise dip in unemployment to 5.3% masking softer details underneath. Employment growth undershot forecasts at 0.2% over the quarter while the participation rate slipped to 70.4% from 70.5%, suggesting the lower jobless rate was driven in part by fewer people participating in the workforce rather than a sharp improvement in hiring.

Wage growth was slightly firmer than expected, with private sector labour costs rising 0.5% over the quarter against expectations for a 0.4% increase. However, annual wage growth holding at 2% still points to subdued underlying pay pressures.

Source: TradingView

Relative to the RBNZ’s forecasts for the March quarter, the outcome was also mixed. Employment growth undershot the bank’s 0.4% forecast while the employment rate came in a touch below the 66.8% level expected at 66.7%. Unemployment matched the RBNZ’s 5.3% forecast while labour cost growth slightly exceeded the 0.4% increase anticipated.

Broader measures continued to point to plentiful labour market slack. Underutilisation remained elevated at 12.9%, while the NEET rate for those aged 15-24, measuring the share not in employment, education or training, climbed to 14.4% from 13.3%.

While the labour market downturn may be bottoming out, the recovery still appears sluggish and fragile, hardly the kind of backdrop likely to force the RBNZ into rushing rate hikes in response to higher energy prices linked to the Iran conflict.

Why the RBNZ may stay patient

Source: Bloomberg

Following the report, markets put the probability of a hike from the RBNZ later this month at 38%, although that comes across as a little ambitious given the signal from the report. While the RBNZ has only one mandate which is to keep inflation low and stable, unless elevated energy prices linked to the Iran conflict remain in the system for quarters, it casts doubt on whether they will deliver meaningful second round inflationary effects with demand weak and so much slack evident in the labour market.

The next key piece of information will be the RBNZ’s Survey of Expectations report on May 13, updating the views of professional forecasters on the outlook for inflation over the next two years. Back in February, two-year inflation expectations sat at 2.37%, edging further away from the midpoint of the bank’s 1-3% inflation target range. You’d suspect it would take a meaningful acceleration back towards the upper end of the range to generate concern about the need for an immediate rate hike two weeks later.

Beyond the May meeting, a hike by July is fully priced with a second by September heavily favoured at 90%. Much will come down to the duration of the Iran conflict, but that profile is starting to look a tad aggressive considering the RBNZ sees neutral settings for the cash rate around 3%.

Risk sentiment driving the Kiwi

Source: TradingView

While money markets remain fixated on local data developments, the New Zealand dollar is not, taking its cues from broader risk appetite right now rather than rate differentials and other traditional drivers such as dairy prices. As seen in the correlation matrix above tracking the relationships between NZD/USD and a variety of market parameters, one of the strongest and most consistent influences has been the performance of equity markets and implied volatility gauges, meaning that’s what traders should be watching when assessing directional risks.

Yes, crude oil prices remain important in that respect right now, but as seen recently, higher prices do not necessarily impact sentiment as severely as they did earlier in the Iran conflict. The vastly different message from the correlation coefficients between two and 10-year yield spreads between the US and New Zealand over the past week underlines that rates are a distant secondary consideration right now, if at all.

NZD/USD range remains intact

Source: TradingView

NZD/USD remains rangebound despite the message from the correlation matrix, suggesting that while there may be a strong linkage with broader risk appetite directionally, the magnitude of the reaction has not matched what has been seen in equities on the upside. The .5920 level remains the key resistance zone overhead, delivering what feels like countless rejections of bullish probes over the past month.

On the downside, the 200DMA marks the bottom of a key moving average zone where dips have repeatedly been bought over the same period, providing the initial range for traders to work with. A close above .5920 may open the door for a run towards .5950 and .6000, both of which have acted as support and resistance in recent months.

Beneath the 200DMA, a series of swing lows are found ahead of more pronounced support at .5774. While less weight should be placed on technical indicators in such a headline-driven environment, the message from RSI (14) and MACD marginally favours long setups over shorts, with momentum ever so slightly tilted towards the bulls right now.

NZD/JPY breakout risks building

Source: TradingView

For NZD/JPY, the string of higher lows over the past week suggests upside risks may be building in the near term, with the pair attempting to break cleanly above the confluence of the 50-day moving average and resistance at 93.00 in early Asian trade.

If the break sticks, 93.00 could be used as a level to build long setups around, allowing for entry above with a tight stop beneath, targeting resistance at 94.30 initially. A break above that level would bring 94.98 and 95.50 into play for bulls.

Should the breakout attempt fizzle, which remains a risk if we see further suspected intervention from Japan’s Ministry of Finance like that seen either side of last weekend, 91.35 is a minor level to watch before a more substantial support zone comprising the Liberation Day uptrend established in April 2025 and horizontal support at 90.80.

While the oscillators are delivering a broadly neutral message on directional risks, the shifts seen over recent days hint that upside momentum may be starting to build again, marginally favouring long setups over shorts.