NZD creeps higher as attentions turn to inflation update
Thursday 13 October, 2022
Daily Currency UpdateThe NZD edged marginally higher through trade on Wednesday amid a settled market backdrop ahead of key inflation data. Having tested new lows early following confirmation from the Bank of England’s Governor Bailey that the emergency gilt purchase program will end on Friday the NZD climbed off lows near US$0.5550, extending to touch a session high just above US$0.5640. Markets had expected policy makers would extend gilt purchases should dysfunction continue. The Bank’s firm messaging drove a surge in risk aversion before rumours emerged officials had privately told bankers the program of support could be extended. The prospect of ongoing central bank backing, coupled with reports the government will walk back key policies responsible for driving much of the recent turmoil, helped ease the risk of tensions and drive a positive NZD response.
The UK remains front and centre in guiding volatility, and our attentions remain closely affixed to developments leading to the week’s end. Our focus today turns to US CPI inflation data. While we expect a moderate correction in headline price pressure, an outsized print would not be a surprise. Markets are much better placed this month to absorb another high print, yet we still anticipate a significant market reaction should we see a read well outside median estimates.
Key MoversThe pound was the day’s big mover, showing plenty of volatility as markets responded to commentary from Bank of England Governor Bailey. The Bank of England sent a clear signal to markets and fund managers confirming emergency backstop measures in place to support the Gilt market will end Friday. Bailey couldn’t have been more direct in addressing funds managers, stating, “you’ve got three days left”. The comments prompted a run on risk assets and another risk-off move. However, markets calmed after reports emerged Bailey had privately told certain banking institutions the program could be extended. The revelation does little for the Bank of England’s credibility but affords some comfort to investors worried about a collapse across gilt markets. With calm restored, the GBP found support in reports the government may backtrack policies key to prompting the latest turmoil. Current and Former cabinet ministers have publicly stated a u-turn is now inevitable, and we anticipate Chancellor Kwarteng will be forced to walk back many of the proposals in his mini-budget before month’s end. The pound rallied through the day, extending off lows at £1.0925 to mark intraday highs at £1.1125.
In other news, the euro failed to keep pace with the GBP and tracked largely sideways against the dollar, while price action across rates markets saw the USD extend through ¥146 against the yen, testing where the next level of intervention will be. Having touched highs at ¥147, there is still no sign of increased buying activity from the Ministry of Finance. We are keenly watching price action on USD/JPY for any signal officials will look to defend further depreciation.
Our attention today turns to the US CPI inflation data. We anticipate headline inflation will moderate somewhat; however, the market is better positioned to absorb another high read, yet we expect a significant reaction should the final number fall wide of median estimates.
- NZD/USD: 0.5480 - 0.5680 ▲
- NZD/EUR: 0.5680 - 0.5850 ▲
- GBP/NZD: 1.9420 - 1.9920 ▲
- NZD/AUD: 0.8820 - 0.8990 ▲
- NZD/CAD: 0.7620 - 0.7790 ▲