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NZD under pressure as US inflation pressures rise

Thursday 11 November, 2021

Daily Currency Update

NZD - New Zealand Dollar

The New Zealand dollar fell through trade on Wednesday, giving up 0.71 US cents following an alarmingly high US CPI print. In a blow to those purporting a transitory assessment of price pressures, inflation rose 0.9% in October taking the annualised rate of increase above 6% to 6.2% while core CPI data was up 4.6%. The sharp increase pushes both CPI and Core CPI inflation to their highest level in 30 years and has prompted investors to again price in two fed rate hikes in the latter half of 2022. Higher US rates have underpinned a broader US dollar advance forcing the New Zealand dollar toward intraday lows at 0.7060. Markets continue to ignore domestic economic performance and monetary policy expectations with Fed forward guidance driving direction. With NZ inflation tipped to extend beyond 6% in the near term, the key differentiating factor is the separation in monetary policy. The RBNZ has already acted to control price pressure, raising rates and forecasting additional rate rises. These have already filtered into wholesale and mortgage rates and are beginning to prompt a correction in domestic demand. The Fed in contrast is fixated on short-term labour market recovery and continues to suppress interest rates further fueling inflation. Until the fed adjusts its policy guidance to meet the market investors will continue to place more stock in Fed policy guidance. We still believe the NZD is undervalued but outside a sustained risk rally gains above 0.7220 will be hard-won.

Key Movers

The US dollar advanced across the board through trade on Wednesday with the dollar index up over half a percent on the day and pushing back toward year to date highs last seen in September. The shockingly high inflation read for October has prompted investors to again price in two interest rates hikes in H2 2022, pushing back on last week's dovish Fed policy stance. There is now a widespread consensus that the Fed and major central banks are in misstep with the realities of the current environment. The October CPI print illustrates this gap perfectly. Those purporting a transitory assessment of inflation pressures were dealt a heavy blow as the extension came as inflation becomes widespread, spilling beyond just a few one-off markets. With prices now rising across the board, it is clear the current policy stance is no longer fit for purpose and it seems the market is bent on front-running rate hikes regardless of central bank rhetoric and candour. The yen was hit the hardest by the correction in global rates as the USD surges toward 114, while the euro slipped below 1.15 to touch 1.1478 while sterling plunged below 1.3450 and appears poised for a break below 1.34. Our attentions today remain with the risk and inflation narrative.

Expected Ranges

  • NZD/USD: 0.7020 - 0.7170 ▼
  • NZD/EUR: 0.6130 - 0.6190 ▲
  • GBP/NZD: 1.8890 - 1.9120 ▲
  • NZD/AUD: 0.9580 - 0.9670 ▼
  • NZD/CAD: 0.8780 - 0.8880 ▼