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Risk-off backdrop prompts NZD correction

NZD - New Zealand Dollar

The New Zealand dollar closed lower through trade on Tuesday, forced below 0.7170 amid a USD rebound and risk-off backdrop. Having tested a break above 0.72 and touched highs at 0.7230 through the latter half of the domestic session, the NZD was driven lower overnight as investors sought to correct the recent risk-on upswing. With little headline data on hand to drive direction, markets appeared plagued by an ongoing lack of conviction shifting toward a risk-off mood in a bid to correct recent gains across commodity currencies, equities and bond yields.

Attentions today turn to domestic CPI data as a key marker governing interest rate expectations. While we anticipate quarterly inflation will print near or at 0.8% and annual inflation will fall well short of the RBNZ’s 2% target a surprise uptick could bring forward expectations for cash rate adjustment. The RBNZ has pledged to look through transition inflation pressures, but with expectations prices will rise in coming quarters, a quicker than expected uptick may prompt markets to price in a rate hike in Q1 2022, a schedule well ahead of other major central banks and a possible catalyst to extend NZD upside.

Key Movers

The US dollar snapped a 6-day losing streak on Tuesday, advancing across the board amid a risk-off backdrop. The dollar index advanced 0.3% while the JPY and CHF outperformed as investors shifted away from risk assets toward traditional haven currencies. There appears little catalyst for the risk-off shift with little headline data or change in recent news flows providing a definitive catalyst. Instead, markets appear plagued by a lack of conviction and resigned to maintaining a narrow range in an environment of suppressed volatility. The euro gave up recent gains yet held on to consolidate above 1.20 while the GBP shifted off highs just above 1.40.

Attentions turn to tonight’s Bank of Canada Policy update ahead of tomorrow’s ECB monetary policy statement as markers for direction and global central bank sentiment.

Expected Ranges

NZD/USD: 0.7080 - 0.7230 ▼

NZD/EUR: 0.5910 - 0.5990 ▼

GBP/NZD: 1.9220 - 1.9480 ▼

NZD/AUD: 0.9190 - 0.9350 ▲

NZD/CAD: 0.8970 - 0.9130 ▲