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Kiwi plunges following mammoth US CPI increase

NZD - New Zealand Dollar

The New Zealand dollar was one of the worst performers through trade on Wednesday, giving up 1.4% against the USD. The Kiwi tracked lower through the domestic session as investors sought to absorb profit on recent gains and square positions ahead of headline US inflation data. Having given up 0.7250 the NZD tumbled below 0.7175 to touch intraday lows at 0.7150 after the US CPI date wrote in well beyond market estimates. Analysts had priced in a 0.2% uptick in nominal CPI and a 0.3% rise in core CPI for April well short of the 0.8% jump in headline CPI and near 1% spike in Core CPI. With risk appetite already vulnerable to fluctuations in inflation expectations the mammoth outperformance prompted a swift risk asset sell-off.

Despite the overnight correction we maintain our long-run bullish forecasts for the NZD. We anticipate the Fed will maintain its commitment to the current monetary policy mandate and continue to look through near term transitory inflation pressures. That said, the shock upswing in April follows modest gains in March. If prices continue to rise through the coming months, pressure will mount on the Fed and perhaps force it to adjust its market view. If the Fed is forced to move on interest rates earlier than currently anticipated demand for risk assets and subsequently the NZD will falter.

Key Movers

The US dollar advanced against all majors excluding the CAD overnight as a dip in risk demand, an uptick in US treasury yields and over-performance in domestic inflation data all lent support to the world’s base currency. CPI data showed consumer prices jumped sharply in April as rising input costs across both labour and raw materials flowed through to the real economy. Near-term inflation concerns have shrouded currency markets in recent days and the latest print forced the 10-year break event point above 2.5% to its highest level in 8 years. With investors scrambling to adjust interest rate expectations, short term demand for risk assets will likely come under pressure. At this point, we maintain our negative outlook for the USD as higher inflation coupled with rising fiscal debt and a burgeoning trade deficit should remain dollar negative. That said, sustained inflation pressure will continue to shape direction across currency markets through the weeks and months ahead.

Expected Ranges

NZD/USD: 0.7080 - 0.7270 ▼

NZD/EUR: 0.5880 - 0.5980 ▼

GBP/NZD: 1.9430 - 1.9780 ▲

NZD/AUD: 0.9220 - 0.9290 ▼

NZD/CAD: 0.8630 - 0.8820 ▼