- The annual inflation rate in New Zealand is expected to fall from 6% in the quarter to June to 5.9% in the three months to September.
- Markets expect inflation of 2% in the third quarter compared to the previous quarter, accelerating from the 1.1% recorded in the second quarter.
- The NZD/USD pair looks vulnerable following a reversal from two-month highs, moving towards recent lows.
Stats NZ will publish Consumer Price Index (CPI) data for the September quarter on Monday 16 October at 21:45 GMT, early on Tuesday in New Zealand. The data could be relevant for the New Zealand Dollar (NZD) and for the Reserve Bank of New Zealand (RBNZ), which will hold its next monetary policy meeting on November 28-29.
Annual inflation in New Zealand peaked in June 2022, at 7.3%. Price growth has slowed through 2023, standing at 6% in the quarter to June, but remains above the RBNZ’s target range of 1% to 3%.
In the second quarter and compared to the previous quarter, inflation increased by 1.1%, slightly below the 1.2% recorded in the previous quarter, but above the market consensus of 0.9%. Despite the persistence of high inflation, the RBNZ has kept the official cash rate unchanged at 5.5% for the last three meetings.
What to expect from New Zealand inflation rate?
The Consumer Price Index (CPI) is expected to have increased by 2% in the third quarter compared to the previous quarter, which represents an acceleration compared to the 1.1% increase recorded in the second quarter. It would be the first acceleration of the quarterly rate since the third quarter of last year. The annual rate is expected to have fallen slightly from 6% to 5.9% by the end of September. These numbers, or even a negative surprise with higher-than-expected numbers, will add pressure to the RBNZ, indicating that the current 5.50% interest rate may not be enough to return inflation to target within an acceptable timeframe.
“The Committee agreed that monetary conditions are restraining spending and reducing inflationary pressure as expected. Although supply constraints in the economy continue to ease, inflation remains too high. Spending must remain moderate to better adjust to the economy’s ability to supply goods and services so that consumer price inflation returns to its target range,” the RBNZ stated at its last meeting on 4 October.
The market expects the RBNZ to keep rates unchanged at the November meeting, but expects another rate hike in February. A higher-than-expected inflation reading could bring forward rate hike expectations to the November meeting. Conversely, a significant slowdown in inflation would dampen expectations of an immediate rate hike.
Elections were held in New Zealand on Saturday, and Christopher Luxon is expected to become the next Prime Minister. As the results are still being determined, it remains unclear what the government will be made up of. Uncertainty surrounding government formation and elections had a limited impact on markets.
When will the Consumer Price Index be reported and how could it affect the NZD/USD pair?
Consumer Price Index (CPI) inflation data for the third quarter will be published on Monday at 21:45 GMT. The N ZD/USD pair reached its highest level in two months, above 0.6050, but then saw a sharp reversal driven by a stronger US dollar and risk aversion, falling sharply to levels below 0.5900. This reversal has changed the short-term outlook to neutral.
The main driver of the fall was the Dollar. The dollar has held firm in the market, supported by the latest round of US economic data, which indicates a resilient economy, a tight labor market and inflation still above target.
If New Zealand’s inflation numbers exceed market consensus, it could raise expectations of a rate hike at the next RBNZ meeting, resulting in a strengthening kiwi. However, a more significant bullish surprise in that direction could damage New Zealand’s economic growth prospects and therefore negatively impact the Kiwi.
The short-term outlook for NZD/USD shows risks tilted to the downside, but losses appear limited as long as the pair remains above the critical support zone at 0.5860. A break below would open the doors to further losses, with the next target around 0.5800.
To the upside, the 20-day and 55-day SMA are hovering around the 0.5955 area, making it an area of ​​significant interest. The next resistance level is located at 0.5980. However, the critical level to watch is at 0.6050 as it represents the recent highs and the 20-week SMA, which acted as a resistance level the previous week. A consolidation above this zone would suggest the possibility of further gains, with a target set at 0.6150.
The Kiwi has not charted a triple low, but it has been close (early September low was 0.5859, early October low was 0.5871 and Friday night low was 0.5884), and the technical outlook will sour if marks a new cycle low.
-ANZ
New Zealand Dollar FAQ
What factors determine the price of the New Zealand Dollar?
The New Zealand Dollar (NZD), also known as Kiwi, is a well-known trading currency among investors. Its value is broadly determined by the health of the New Zealand economy and the policy of the country’s central bank. However, there are some peculiarities that can also cause the NZD to move. The evolution of the Chinese economy tends to move the Kiwi because China is New Zealand’s largest trading partner. The bad news for the Chinese economy will likely translate into fewer New Zealand exports to the country, which will affect the economy and therefore its currency. Another factor moving the NZD is dairy product prices, as the dairy industry is New Zealand’s main export. High dairy prices boost export earnings, contributing positively to the economy and therefore the NZD.
How do RBNZ decisions affect the New Zealand Dollar?
The Reserve Bank of New Zealand’s (RBNZ) goal is to achieve and maintain an inflation rate of between 1% and 3% over the medium term, with the aim of keeping it close to the midpoint of 2%. To do this, the bank sets an appropriate level of interest rates. When inflation is too high, the RBNZ raises interest rates to cool the economy, but the move will also drive up bond yields, making it more attractive for investors to invest in the country and thus boosting the New Zealand dollar. On the contrary, lower interest rates tend to weaken the NZD. The so-called rate differential, or what rates in New Zealand are or are expected to be compared to those set by the US Federal Reserve, can also play a key role in the movement of the NZD/USD pair.
How does economic data influence the value of the New Zealand dollar?
The release of macroeconomic data in New Zealand is key to assessing the state of the economy and can influence the valuation of the New Zealand dollar (NZD). A strong economy, based on high economic growth, low unemployment and high confidence is good for the NZD. High economic growth attracts foreign investment and may encourage the Reserve Bank of New Zealand to raise interest rates if this economic strength is accompanied by high inflation. Conversely, if economic data is weak, the NZD is likely to depreciate.
How does overall risk sentiment influence the New Zealand Dollar?
The New Zealand Dollar (NZD) tends to strengthen during periods of risk appetite, or when investors perceive overall market risks to be low and are optimistic about growth. This usually translates into a more favorable outlook for commodities and so-called “commodity currencies” such as the Kiwi. Conversely, the NZD tends to weaken in times of market turmoil or economic uncertainty, as investors tend to sell riskier assets and flee to more stable havens.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
