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Kiwi falls 2.29% as NZ inflation expectations take a hit

NZD - New Zealand Dollar

The New Zealand dollar led the world for the largest fall in Major currencies overnight, plummeting 2.29% to open this morning at 0.6994. Global risk aversion and US dollar strength had a part to play, but ultimately it was the NZ Governments new policy measures to tackle excess house price inflation that drove the Kiwi lower. While it is too early to tell how the housing market will react to the changes, the broad strokes of the policy shift should see lower house prices, leading to less growth in housing debt and less inflation. This however undermines the RBNZ’s inflation mandate to an extent as the wealth effect from increasing house prices is something they can no longer rely on. With less inflationary pressure from housing expected moving forward, the market reaction has been that the overall effect of the policies on the economic outlook is negative in the medium term. There is now just one rate hike priced in for next year and there were significant falls in the swap market. With less domestic inflation expected, the Kiwi has fallen precipitously.

In the day ahead, there is little on the economic calendar to drive direction with movements expected to be driven from offshore.

Key Movers

The Greenback was the clear beneficiary in overnight trading as risk sentiment turned decidedly negative. The US Dollar Index (DXY) rose a steady 0.67% to 92.36 as a consequence of risk-off flows into safe haven currencies. This comes despite a fall of 3.75% in the 10-year bond rate. Moving forward, Fed Chair Powell and Treasury Secretary Yellen have begun a two-day hearing in front of lawmakers. So far there hasn’t been anything new or market moving to digest, but that may change in tomorrow's session.

Across the Atlantic, both the euro and sterling had a day to forget with the euro falling 0.68% against the Greenback and the sterling falling 0.76%. Opening this morning at 1.1849 and 1.3749 respectively, it was again a story of US dollar strength that drove the currencies south although a third COVID-19 wave and new lockdown measures employed by some countries certainly did not help.

Expected Ranges

NZD/AUD: 0.9078 - 0.9270 ▼

NZD/CAD: 0.8724 - 0.8900 ▼

NZD/EUR: 0.5848 - 0.5967 ▼

GBP/NZD: 1.9436 - 1.9830 ▲

NZD/USD: 0.6931 - 0.7072 ▼