The cracks in New Zealand's economy are widening. Unemployment is surging, youth disengagement is accelerating, and the RBNZ looks set to slash rates again. NZD/USD has broken down hard, while AUD/NZD is flying.
* NZ unemployment hits 5.3%, highest since 2016
* Participation rate drops to 70.3%, masking flat employment growth
* Swaps fully price a 25bp cut on Nov 26, with risk of more to come
* NZD hammered against USD and crosses
Summary
New Zealand's September quarter jobs report delivered a clear message: labour market conditions are still deteriorating. Unemployment is rising, participation is falling, and youth disengagement is accelerating. With inflation pressures easing, markets are now fully priced for another RBNZ rate cut this month, with more potentially to follow. NZD/USD has broken several support levels, opening the door to further downside, while AUD/NZD has surged to levels not seen since 2013.
Recessionary Report Card
New Zealand's unemployment rate rose to the highest level in nearly a decade in the September quarter, keeping the Reserve Bank of New Zealand on track to cut the cash rate again when it meets in late November.
Unemployment increased to 5.3% from 5.2% in Q2, the highest since late 2016. The result matched economist forecasts and the RBNZ's August projections. Total unemployment rose to 160,000, including 22,700 people out of work for more than a year.
Broader measures of labour market slack also ticked higher, increasing the likelihood of further moderation in wage pressures and, in turn, softer domestic inflation. Labour underutilisation rose to 12.9% from 12.8% in the June quarter.
Source: TradingView
Helping to limit the rise in unemployment, the labour force participation rate continued to decline, slipping 0.2 percentage points to 70.3% -- the lowest since late 2020. It has now fallen two full percentage points from mid-2023, helping to cap the overall increase in unemployed numbers as more Kiwis leave the labour force.
The decline in participation helped mask another quarter of flat employment growth, undershooting both economist and RBNZ forecasts for a 0.1% increase. Compared to a year earlier, employment has fallen 0.6%, reflecting recessionary conditions outside the agricultural sector.
Pointing to growing disengagement among young Kiwis, the share of 15 to 24-year-olds not in employment, education or training rose to 13.8%, the highest since 2018. Youth unemployment climbed to 15.2%, up more than two percentage points from a year earlier.
There was a small upside surprise in private sector wage growth excluding bonuses, up 0.5% for the quarter against forecasts for 0.4%. Annual growth was in line with RBNZ expectations at 2.1%. There is nothing in that number to worry policymakers about the risk of a wage-price spiral -- quite the opposite.
Kiwi Crunched as RBNZ Rate Cut Bets Swell
Source: Bloomberg
On the back of the data, swap markets are now fully priced for the RBNZ to deliver a 25 basis point rate cut on November 26, with a small risk of a follow-up 50 to the one delivered in October. By October next year, another full 25 basis point cut is priced with around a one-in-five chance of a second, suggesting the cash rate may fall beneath 2% this cycle.
Combined with the risk-off tone in markets on Tuesday and growing expectations that the RBNZ may be forced to cut well into stimulatory territory to kickstart the economy, the New Zealand dollar has been crunched, falling heavily against both the U.S. and Australian dollars.
NZD/USD Downside Breaks Deepen
Source: TradingView
The downside risk in NZD/USD flagged earlier this week has materialised and then some over recent days, with the rising wedge break last week sparking a wave of fresh selling. The pair took out the October lows before stalling at .5640 support. Beneath this level, there is little in the way of meaningful support until the October 2022 low of .5515.
A break and close beneath this level would create a potential short setup, allowing for positions to be established beneath with a stop above, targeting .5515. Should .5640 continue to hold -- which looks increasingly debatable -- the setup could be flipped with longs established above with a stop below, targeting former support at .5678 initially.
The message from momentum indicators is entirely bearish, favouring short setups. RSI (14) continues to trend lower beneath 50, indicating increased downside pressure. However, sitting beneath 30, it's now in oversold territory, warning of the potential for a short-term squeeze, which places extra importance on the entry level for those contemplating shorts. MACD tells a similar story, crossing the signal line from above while remaining in negative territory, adding to the bearish picture.
AUD/NZD Breakout Extends to Decade Highs
Source: TradingView
AUD/NZD has continued its impressive run after bouncing off support at 1.1280 last month, taking out the October high of 1.1450 before steamrolling through the October 2022 high of 1.1490 on Tuesday following the jobs report, briefly trading above 1.1500 for the first time since 2013.
With momentum indicators firmly bullish, the push above 1.1490 creates a potential long setup should the price remain above it. Positions could be established above with a stop below, targeting resistance at 1.1630 initially with 1.1755 another option after that. Alternatively, if the pair were to reverse back beneath 1.1490 and hold there, you could flip the setup, initiating shorts below with a stop above, targeting 1.1445 or 1.1350.
While the momentum picture favours bullish setups, with RSI (14) sitting in overbought territory above 70, it warns of potential reversal risk, keeping countertrend setups in the mix.