NZ Services PSI Hits 48.9 – Not Yet a Game-Changer for Kiwi

New Zealand’s Business NZ Performance of Services Index (PSI) rose to 48.9 in April from 46 in March. The headline reading shows the steepest contraction since mid-2023 has eased. The index remains below the 50 mark that separates expansion from contraction. For the RBNZ, this creates a policy dilemma that is harder to read than a simple recovery signal.

April PSI at 48.9: Two-Sided Risk for the RBNZ

The naive interpretation is that a less-bad service sector supports the New Zealand dollar. Services account for roughly two-thirds of NZ economic output. A print at 48.9 means the sector is still shrinking, just at a slower pace. If the services trend mirrors recent manufacturing data, the economy is treading water. The RBNZ has held the official cash rate at 5.5% since May 2023, betting that demand restraint will pull inflation back to target. A services sector stuck below 50 gives the bank cover to hold steady. It also raises the risk that sustained weakness eventually forces a cut before inflation is fully tamed.

The better market read acknowledges that the RBNZ’s job is now more complex. If services activity firms but inflation does not fall fast enough, the bank cannot cut – and the economy remains in a low-grade contraction. If services deteriorate again, the bank faces pressure to ease even with inflation above target. That two-sided risk keeps the NZD vulnerable to any shift in data expectations. The services gauge is also a leading indicator for wage and hiring decisions. A reading in the high 40s suggests firms are still cutting costs, not hiring. That feeds into household income and spending, which in turn affects domestic inflation. The RBNZ will need at least a sustained move above 50 before it can signal any policy pivot. Until then, the data keep the bank in wait-and-see mode.

NZD/USD Hinges on Policy Divergence With the Fed

The NZD/USD pair has been under pressure as hot US jobs data reset the dollar floor. The US services ISM also printed above 50, reinforcing the Federal Reserve’s higher-for-longer stance. That widens the rate gap between the RBNZ and the Fed. As long as the NZ economy is flirting with contraction, the kiwi lacks a catalyst to rally. Traders tracking the forex market should watch whether the PSI improvement is confirmed in the next print. A move above 50 would change the narrative. A slip back toward 46 would confirm the recovery is fragile and open the door for NZD shorts when the next US data beat hits. The correlation between NZ services activity and the kiwi has been high over the past 12 months, and the currency strength meter currently shows the NZD as the weakest of the commodity bloc. For a deeper breakdown of the RBNZ’s policy path from this same data point, see the earlier AlphaScala analysis: Why NZ Services PSI at 48.9 Signals a Two-Sided RBNZ Problem.

The Next Decision Point: May PSI Data Before July RBNZ Meeting

The May PSI data, due in early June, will be the next hard input for the RBNZ before its July meeting. If the index stays below 50, the central bank’s language will likely remain cautious. If it jumps above 50, markets will start pricing a later and smaller cut cycle. Either way, the NZD/USD is likely to stay driven by external dollar moves rather than domestic data until the RBNZ explicitly shifts its bias.

For the moment, the April PSI at 48.9 is a step in the right direction for the economy. It is not yet a game-changer for the New Zealand dollar. The RBNZ needs two to three months of sustained improvement before it can even talk about easing. Until that evidence arrives, the kiwi remains a tactical short when the dollar rallies.