NZD in the doldrums
|The New Zealand dollar saw heavy selling pressure on Friday amid weak inflation data, which confirms the Reserve Bank’s cautious stance. The Kiwi fell 0.53% against the greenback and hit $0.7230. Indeed, headline inflation eased to 1.1%y/y in the first quarter, down from 1.6% in the previous quarter. After increasing 0.5% in the December quarter last year, tradable inflation contracted 0.40%y/y, while non-tradable inflation eased to +2.3%y/y. The relative strength of the Kiwi during that period explains most of the reduction in price pressures. However, the sector factor model, which is used by the RBNZ as a core measure of inflation, shows that the picture is not that dark as the core gauge held steady at 1.5%y/y (the central bank is targeting 2% +/-1%).
In our opinion, it is reasonable to expect further downside in NZD/USD as the interest rate differential continues to move deeper in negative territory, making short NZD bet costly. In addition, speculators are still net long Kiwi (non-commercial position: net long 40% of total open interest) and will most likely to unwind position as the currency nosedive.
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On the downside, the next key support can be found at 0.7188 (low from March 29), then 0.7154 (low from March 21). On the upside, a resistance lies around 0.74 (high from mid-April). All in all, a return towards 0.70, or even below, seems reasonable.
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