ANZ’s New Zealand Business Confidence index rose to 10 in May, reversing from -10.6 previously. The move takes the gauge back into positive territory after a period of negative readings.
The release provides an updated snapshot of sentiment, with the index improving by 20.6 points month on month. ANZ reported the May level at 10 versus the prior -10.6.
Positive Shift in Business Sentiment Signals Economic Momentum
We view the jump in business confidence to +10 as a clear positive signal for the New Zealand economy. This significant shift from last month’s negative reading suggests underlying momentum is building. This reinforces our view that economic activity is turning a corner after a prolonged period of weakness.
This data will likely strengthen the Reserve Bank of New Zealand’s resolve to keep the Official Cash Rate (OCR) at its current restrictive level of 5.5%. With recent inflation data still hovering around 4%, the RBNZ cannot risk a premature easing, and this report pushes back any expectation of rate cuts. We are now pricing a lower probability of a rate cut before the first quarter of 2027.
Market Implications: Currency and Equities Outlook
Consequently, we see upside potential for the New Zealand dollar, particularly against currencies with more dovish central banks. We are looking at call options on the NZD/USD, anticipating a potential break above the recent resistance around the 0.6200 level. The supportive interest rate differential makes holding long NZD positions more attractive.
For the local equity market, this renewed optimism is a tailwind for corporate earnings. Historically, periods where confidence has swung from negative to positive, such as the post-2020 recovery, have preceded gains in the NZX 50 index as companies move forward with investment. We are considering increasing our exposure through index futures, as improved domestic demand should translate into better profit margins.
