NZD vulnerable to deeper correction as market focus shifts
Daily Currency Update
The New Zealand dollar tracked within a narrow trading handle throughout Monday, bouncing between US$0.6210 and US$0.6260. Alongside the AUD the NZD has borne the brunt of the USD correction through the new year amid a firmer macroeconomic backdrop and weaker China growth outlook. Hopes of a March Federal Reserve Rate adjustment have faded and brought into stark contrast relative expectations for monetary policy across major central banks. Disinflation expectations drove direction through the back half of 2023, but as we move closer to policy change, relative expectations are now gathering momentum and shaping direction. With the RBNZ most likely to proffer a dovish surprise through 2024 the NZD faces near term downside risk, particularly while the USD remains on the front foot. With limited domestic data available on the macroeconomic ticket our attentions turn to US inflation data. We expect a surprise uptick in December price pressures extending the New Year correction.Key Movers
Demand for the US dollar accelerated through trade on Monday as markets continue reversing the pre-Christmas sell off amid growing uncertainty surrounding Federal Open Market Committee policy. It seems markets were too quick in embracing disinflationary forces, misjudging the likely timing behind any Fed policy adjustment. Investors had brought forward expectations for a rate cut to as early as March but a string of solid US data sets and cautious FOMC minutes forced a re-adjustment and fading of rate cut hopes. While the US is certainly in the midst of a slowdown, risks activity will pick up ahead of schedule remain in play and we expect the Fed will err on the side of caution when battling inflation, delaying any rate cut until at least June. With the USD on the front foot, the Euro remains increasingly vulnerable to a correction. The single currency has already given up much of the gains won through December and with the global growth outlook unlikely to offer any meaningful improvement through Q1 the Euro could be exposed to further downside risks and a possible move back toward 1.05. In other news earthquakes in Japan and ongoing dovish commentary from Bank of Japan Governor Ueda mean the Yen faces ongoing downside risks. Expectations for an early rate adjustment have been pushed back.Our attention turns now to key US inflation data. A CPI report on Thursday and PCE inflation release on Friday should provide key insights into ongoing inflation pressures and help shape expectations for Fed policy. We expect a small rise in headline CPI amid rising gasoline prices while core CPI edging lower amid an easing in services lead inflation.
Expected Ranges
- NZD/USD: 0.6180 - 0.6280 ▼
- NZD/EUR: 0.5650 - 0.5750 ▼
- GBP/NZD: 2.0200 - 2.0500 ▲
- NZD/AUD: 0.9270 - 0.9330 ▲
- NZD/CAD: 0.8280 - 0.8380 ▼