NZD/USD “Good” Increase in Unemployment – What It Means to Markets and Us Everyday Investors
New Zealand’s job market is sending out some conflicting signals and currency traders are taking serious notice.
In a surprising turn this week, the country’s unemployment rate rose to 5.4 percent in the final quarter, slightly exceeding expectations, but not the way most economists believed. At the first sight a rising jobless figure may appear negative but analysts are calling it a “good” rise because it shows deeper shifts beneath the surface of the economy.
Let’s unpack what’s going on and why it should be of interest to anyone with a stake in keeping an eye on the Kiwi dollar and world markets.
Job Growth Outpaced Expectations But So Did Job Unemployment
Here’s the twist: New Zealand actually added more jobs than economists expected, with employment up by about 0.5 per cent, well above the small growth expected. Usually, job growth meant less people were out of work but this time, unemployment increased instead.
Why? Due to more people working in search of work which is a sign of growing confidence of jobseekers. When participation increases faster than employment is being hired, the unemployment rate increases even though more jobs are being created. This, according to economists, is not a collapse in the job market, but a healthy bump in the market.
This combination of stronger employment and increasing unemployment might seem counter intuitive, but many in the pros on the jobs market have viewed this as a sign that the labour market is making a healing recovery after a prolonged period of slack. It is suggestive that people who dropped out of the workforce are actually once again seeking out jobs and this may be a common thing we find with improving economies.
How FX Traders Are Reading the Data
For currency markets, it was the report about NZD/USD exchange rate that was of importance, as it is a measure of the value of the New Zealand dollar in terms of the US dollar.
After the data hit the screens the Kiwi remained relatively firm, trading above the 0.6000 level a psychologically important mark for traders. An increase in unemployment typically causes a currency to weaken as a result of it being a predictor of slower economic growth. But this time, the presence of better job creation and increasing participation has kept traders cautious as opposed to panic-selling.
At the same time, broader forces are pushing and pulling the currency pair mildly elsewhere worldwide. The US dollar has been showing signs of weakness in recent months due to political uncertainty including debates over government spending and delays in key economic reports making the Kiwi look comparatively stronger.
What About the Reserve Bank Of New Zealand?
Central banks are paying a lot of attention to job numbers because employment affects inflation and interest rate policy.
Although the unemployment number ticked higher, wage growth is muted meaning workers aren’t pushing for big pay rises yet. With inflation pressures still relatively subdued, the Reserve Bank of New Zealand (RBNZ) may not feel too much urgency to increase interest rates anytime soon. In turn, this tends to restrict increases in the currency.
Put simply: strong wages can prompt a central bank to raise interest rates which ordinarily helps a currency gain strength but that’s not the case yet. Instead, the RBNZ appears likely to continue its policy. In the near-term, perhaps in turn leaving the future direction of the Kiwi more dependent on global risk sentiment, rather than domestic rate moves.
What Does This Means for Investors and Average People?
If you’re not a forex trader, don’t worry there are real world implications to this story too:
- Jobseekers – Increased participation is a positive indicator for the jobseekers, as it means an increasing amount of people are entering the job market, which in turn is a good sign that there may continue to be a growing amount of opportunities.
- Consumers – Wage growth continues to be weak and so inflationary pressures may remain tame with everyday prices remaining reasonably stable.
- Investors – Currency markets could continue to be volatile with global factors such as US economic policy and China’s growth outlook continuing to impact upon the Kiwi.
Final Takeaway
New Zealand’s jobs report provided a surprise – unemployment was up, but so were jobs and labor force participation. This strange combination has made the markets a guessing game and the FX traders to remain on the kill. Whether you are a follower of exchange rates, global economics, or just want to be informed about where the job market is headed, this report highlights the fact that not all unemployment increases tell the same story.
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