Home Daily Commentaries NZD scuppered by sharp downturn in inflation expectations

NZD scuppered by sharp downturn in inflation expectations

Daily Currency Update

The New Zealand dollar fell through trade on Tuesday despite improved risk sentiment and a US dollar downturn. Yesterday’s Q3 inflation report showed a much lower-than-expected annual inflation rate. Year-on-year inflation fell to 5.6% compared with the RBNZ’s and market estimate of 6%, while underlying core inflation measures all portrayed a picture of weakening inflation pressures. With market focus returning to central bank policy expectations amid hopes world leaders will broker some form of resolution between Israel and Hamas before the conflict descends into an all-out regional war the data supported maintenance of the RBNZ’s neutral policy platform. The NZD moved sharply lower following the print dipping toward US$0.59 before tracking steadily lower through the domestic session and overnight. A stronger-than-expected US retail sales print forced the NZD toward intraday lows at US$0.5870 before markets pared USD gains against already long positions.
Our attention now turns to China activity data and UK CPI data as key macro markers guiding direction.

Key Movers

A robust US retail sales print spurred a rally in US treasury yields Tuesday as markets price in the possibility of another Fed rate hike before the end of the tightening cycle. Retail sales were much stronger than anticipated, defying the narrative that higher interest rates and constrictive financial conditions are pushing the US economy toward recession. With industrial production surprising to the upside as well investors were forced to price in one more rate hike if not in November then at least the December or January meetings. Markets are now pricing a 60% chance of another rate hike, helping propel the USD higher early before paring gains and finishing lower to flat for the day. With many investors already long USD and risk aversion easing support for an extended USD upside is waning. The euro has pushed back above US$1.0550 while the yen closed flat and the GBP slipped back below US$1.22.

Our attention now turns to China activity data and UK CPI numbers. With annual UK inflation expected to fall toward 6% a print above expectations will drive Bank of England rate hike expectations and could afford the GBP near-term support.

Expected Ranges

  • NZD/USD: 0.5850 - 0.5950 ▼
  • NZD/EUR: 0.5550 - 0.5650 ▼
  • GBP/NZD: 2.0400 - 2.0800 ▲
  • NZD/AUD: 0.9220 - 0.9380 ▼
  • NZD/CAD: 0.8000 - 0.8100 ▼