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NZD outperforms counterparts on Thursday, buoyed by relief rally

NZD - New Zealand Dollar

The New Zealand dollar outperformed Thursday, enjoying modest gains on the tail of a relief rally across equity and bond markets. Having slumped below 0.7150 in the wake of Wednesday's shock US CPI print, the NZD tracked sideways through much of the domestic session before climbing higher overnight, testing a break back above 0.72 and touching intraday highs at 0.7210. Inflation expectations continue to drive market direction and as US 10-year break-even rates continue to test new highs, it's important to note that New Zealand’s own break-even handle is closing in on 2%, a level it has not reached since 2014. What does this mean? As the break-even inflation rate continues to rise, pressure mounts on the Federal Reserve to raise interest rates. Such a move would shift the current core central bank dynamic and prompt a risk asset sell off. Rising NZ rates could help counter such a move. Rising domestic inflation may prompt a similar reaction from the RBNZ, helping the NZD maintain its yield advantage. We remain confident the NZD will retain its bullish bias, with a caveat to changes in inflation and interest rate expectations.

Key Movers

Price action across currency markets was modest Thursday as investors continued to digest Wednesday’s response to the sharp rise in US inflation. The dollar index tracked sideways, consolidating Wednesday appreciation, while the euro and GBP remain largely unchanged trading at 1.2080 and 1.4050 respectively. The Canadian dollar was the days big mover, driven lower by a falling oil price and dovish commentary from the Bank of Canada. BoC governor Macklem sighted concerns around the appreciation of the currency while affirming the bank's commitment to accommodative monetary policy, announcing “the BoC will keep its accommodative platform in place until there is a complete recovery in the economy”. The comments seemingly contrast with those proffered in the wake of their last meeting wherein policy makers appeared hawkish in their assessment of the recovery, suggesting conditions for a rate hike would likely be met in the second half of next year. The walk back saw the CAD fall below 0.8250, testing a break below 0.82 before creeping higher into this morning’s open.

Expected Ranges

NZD/USD: 0.7150 - 0.7230 ▲

NZD/EUR: 0.5910 - 0.5990 ▲

GBP/NZD: 1.9380 - 1.9650 ▼

NZD/AUD: 0.9250 - 0.9330 ▲

NZD/CAD: 0.8650 - 0.8790 ▲