A few reasons NZD could weaken on the back of New Zealand’s inflation report

In the latest New Zealand Institute of Economic Research survey of 4300 businesses, it showed that uncertainty amongst businesses remain. Although the survey has bounced from the lows marked during last year’s election, the data still gives a not so optimistic outlook with a reading of -20. Furthermore, fewer businesses expect input prices to increase, with 33% believing prices will rise as opposed to 40% from the previous quarter.


Chart: Reuters Eikon

The report along with recent PMIs paint a picture of an economy in the process of muddling along, rather than one experience a growth acceleration with a higher rate of inflation on the horizon.

Another supporting factor is the latest REINZ House sales number which came in weaker overnight. The implementation of the Foreign real estate ban looks to be impacting the housing market. As a result, CPI data on Wednesday night may also disappoint.

Despite the domestic story and global risk events including developments in Syria and the trade war narrative, the typically ‘risk on’ NZD has remained well bid throughout 2018. Even with a narrowing rate differential on the back of the Fed raising rates and RBNZ standing still, NZD/USD has continued to climb.


Check out how the rate differential and NZD/USD exchange rate has diverged…


Chart: Traders Corner

Interestingly, NZD positioning went from net short in mid-March, to pretty long as of last week’s positioning data. Considering the weakening fundamental outlook and aggressive market positioning, I feel a short NZD position (against the consensus) ahead of the CPI release may prove to be fruitful.

NZD Net Positioning


Chart: Traders Corner

I accept that short NZD/USD has been a tough trade this year as the weak USD theme has remained dominant, but there is an argument for a weaker NZD, and a disappointing CPI number could be the catalyst.

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