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Kiwi slips back below 0.72 ahead of key inflation print

NZD - New Zealand Dollar

The New Zealand dollar underperformed through trade on Tuesday in what was otherwise a largely lacklustre trading session. Price action across currency and financial markets remained muted, yet the NZD slipped back below 0.72 US cents, giving up 0.5%. There appears no obvious reason for the NZD correction as markets are seemingly content in treading water ahead of the weeks all important US CPI data print. The only possible explanation is a shift in commodity price performance and near-term risk demand. Commodity prices strengthened on Tuesday, closing in on a 6-year-high and perhaps highlighting the increasing impact of elevated commodity prices on input costs and supply constraints. There is a growing fear higher commodity prices will spill over into increased inflationary pressure. A sustained uptick in inflation will only advance calls that suggest price increases are more than a transitory, short term by product of the pandemic. If central banks are forced to unwind accommodative monetary policy ahead of schedule to combat inflation, it could derail the speed of economic recovery.

Our attentions this week remain squarely affixed to US CPI data.

Key Movers

Outside a correction in commodity currencies price action across majors was largely muted on Tuesday with both the EUR and GBP maintaining a narrow handle as markets appear content in treading water ahead of tomorrow’s all important US CPI print. Having outperformed in April, investors are anxious to understand if heightened inflationary pressures are indeed transitory or evidence of an emerging trend. Leading indicators show supply constraints, elevated commodity prices and increasing input costs have continued through Q2 and could well spill over into a broader CPI increase. Any uptick outside expectations will likely drive another risk-off run as the prospect of tighter monetary policy to combat inflation threatens to derail the recovery.

Our attentions today turn to Chinese CPI and PPI as possible markers of global inflation, while the Bank of Canada could prompt some price action. At its last meeting the Bank of Canada tapered bond purchases and brought forward its guidance on interest rate adjustments and investors will be keenly attuned for any further change in policy. We expect the BoC will sideline further adjustments and await further market data before altering monetary policy again.

Expected Ranges

NZD/USD: 0.7130 - 0.7250 ▼

NZD/EUR: 0.5870 - 0.5940 ▼

GBP/NZD: 1.9470 - 1.9770 ▲

NZD/AUD: 0.9280 - 0.9350 ▼

NZD/CAD: 0.8630 - 0.8770 ▼