NZDUSD takes a hit on disappointing inflation figures – eyes on China's data dump

The kiwi took a battering after NZ’s Q1 inflation data missed estimates. Consumer prices rose 0.3% q/q, less than an expected 0.5% increase (prior 0.1%), which casts some doubt over the market’s assumptions about the Reserve Bank of New Zealand’s (RBNZ) tightening cycle. The market is pricing in some fairly aggressive monetary policy tightening from the RBNZ in the next couple of years, underpinned by predicted strong growth and inflation.

While today’s figures aren’t a game changer, they do cast some doubt over the idea of rampant inflation in NZ. The RBNZ began what is expected to be a prolonged tightening cycle mid-way through the last month of the quarter, but it shouldn’t have had much of an effect on today’s inflation figures.

A jump in tobacco prices and a strong housing market offset falling fruit, meat, furniture and household supplies prices. The biggest rise in prices came from tobacco, but the government’s annual increase in the excise tax for tobacco is predictable, thus it shouldn’t be a surprise to the market that prices shot higher in Q1. The concern is that once tobacco prices are taken out of the equation, inflation was flat over the quarter.

China is expected to have decelerated in Q1

The market is now turning its attention to the release of a slew of important economic data out of China at 02:00GMT. The world’s second largest economy is predicted to have grown 7.3% y/y, the lowest level since Q1, 2009. Beijing has set a target of around 7.5% for this year, but the government has stated that it’s comfortable with lower levels as long as there are no major fluctuations and employment holds up. Industrial production, retail sales and fixed asset investment are expected to have increased 9.0% y/y, 12.1% y/y and 18.0% y/y respectively.

The kiwi

NZDUSD dropped through a support zone around 0.8620 following the release of NZ’s disappointing inflation figures. At the time of writing the pair is testing a support zone around 0.8600. A break here may coincide with a break of medium-term trend line support, thus the pair may suffer. Nonetheless, it may find some support around 0.8510 if price continues to push lower. Keep in mind, the kiwi, being a commodity currency, can be very responsive to Chinese economic data, thus today’s data dump may determine the near-term future of the pair, especially since there has been some much chatter about Chinese growth concerns.

Source: FOREX.com