NZD/USD May Weaken as Goldman Sachs Downgrades Chinese Growth Outlook

• New Zealand Dollar falls against USD as risk-off flows strengthen

• Chinese economic outlook downgrade, inflation causing concern

• NZD/USD falls toward former Rising Wedge resistance level

The risk-sensitive New Zealand Dollar weakened overnight as global concerns over the highly transmissible Delta Covid variant weighed on sentiment. Market participants ignored Delta's initial spread, with vaccine rollouts boosting optimism that it wouldn’t dent economic growth. The tide is quickly shifting, however. The US Dollar is also weighing on NZD as rate hike bets rise following last weeks NFP report.

Moreover, Goldman Sachs downgraded its growth forecast for China. Analysts at the bank see Covid-induced lockdowns and social distancing measures dragging on spending and consumption. The Peoples Bank of China (PBOC) cut reserve requirement ratios for banks in a surprise move last month. Slower growth may force Beijing to ease fiscal and monetary policy further, especially if Covid restrictions persist.

While the Chinese economy is vital to global growth and capital markets, New Zealand is particularly susceptible due to its economic and trade proximity. Additional easing actions from the PBOC may shore up support, but the central bank faces a difficult situation as it tries to balance easing measures against surging prices. Consumer and producer prices remained elevated in July, according to government data released this week. CPI rose 1.0% on a y/y basis, while PPI increased at 9.0%, both beating analysts estimates.

Tuesday morning, New Zealand reported electronic retail card spending data that provided insight into the retail sector. Card spending for July increased 0.6% on a m/m basis, down from 0.8% in June. On a year-over-year basis, card spending rose to 4.7% from 4.0% the month prior. The data shows the Kiwi economy is performing well domestically as consumers spend money.

However, overall, considering the newfound pessimism for the economic outlook in China, the New Zealand Dollar may remain capped near current levels. Still, Kiwi bulls may be able to take advantage of the situation. The Australian Dollar typically displays a higher correlation with China‘s economy, which can open the door for AUD/NZD to underperform. Australia’s ongoing lockdowns as it battles Covid outbreaks serve to bolster the premise behind that position.

NZD/USD has quickly surrendered gains seen from a Falling Wedge breakout that occurred last week. Prices may fall further to test the wedges former resistance level, which is not untypical following these moves. However, a break below that former resistance, if it does occur, would put a more bearish spin on the outlook. Alternatively, bouncing from the same level could reopen the door for an upside move.