The New Zealand dollar is today the strongest G10 currency, gaining 0.4% against the U.S. dollar, 0.2% against the euro, and 0.6% against the yen. Lower-than-expected unemployment has slightly eased concerns about an overcooling labor market, though it doesn’t shift expectations for upcoming decisions by the Reserve Bank of New Zealand.
The NZDUSD pair has broken out of several days of stagnation, though a reversal of the short-term downtrend will only be possible after surpassing the 100-day EMA (dark purple). Optimism has also extended to the neighboring Australian dollar.
Labor Market Slowing, but No Surprises
The unemployment rate rose to its highest level since Q3 2020 (5.2% YoY), although the reading was softer than the market’s more pessimistic expectations (5.3% vs. 5.1% in Q1). Employment fell by 0.1% quarter-over-quarter, in line with expectations, while wages rose by 0.6%.
Despite the better-than-expected unemployment figure, the overall data paints a picture of a significant slowdown in New Zealand’s economy, which is particularly burdened by uncertainty stemming from U.S. trade policy due to its economic ties to Australia and China. The slowdown is especially evident in the services sector, which, according to PMI data, has been contracting since February.
Markets are pricing in at least one rate cut by the end of 2025. Source: Bloomberg Finance LP
End of Labor Market Weakness?
New Zealand policymakers emphasize that the better-than-expected data is no reason to celebrate. “We’re not satisfied with the unemployment rate, and we work every day to build an economy that provides more jobs and more opportunities,” said Finance Minister Nicola Willis today.
However, there is no consensus among politicians and economists regarding the outlook for unemployment dynamics. According to Willis, unemployment should decline by year-end, and exports should continue to grow on free trade agreements, which are expected to offset the shock from Donald Trump’s tariffs.
On the other hand, Bloomberg Economics highlights that weekly and monthly data point to a continued decline in employment, which contradicts the more optimistic projections from the RBNZ (i.e., falling unemployment and a rebound in job numbers). If the trend doesn’t reverse, unemployment could reach as high as 5.5%.
The yield spread between 10-year New Zealand and U.S. bonds has been moving sideways since April. Source: XTB Research
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