The NZ dollar is the big mover early in the Asia session, with the commodity currency being assaulted by sellers after some disappointing inflation data. NZ Q3 consumer prices rose 0.3% q/q, missing an expected 0.5% increase. This brings year-on-year inflation to 1.0% from 1.6% previously.
Today’s data is likely to greatly reduce any motivation the Reserve Bank of New Zealand (RBNZ) has to tighten monetary policy in the foreseeable future. The bank went on a tightening cycle earlier this year in response to a very hot property market, but prices have since cooled. And today’s numbers show that inflation was well below the RBNZ’s target last quarter which has pushed it to the bottom of the bank’s 1-3% target range.
Investors, banks and other market players immediately began to push back their expectations for interest rates in NZ on the back of today’s figures. In fact, it’s entirely possible that the RBNZ will leave monetary policy alone until late 2015. The determining factor may be the kiwi, which is holding back tradable inflation – non-tradable inflation rose 0.5% q/q, while tradeable inflation only rose 0.1% q/q.
If the NZD dollar doesn’t fall materially then the RBNZ is likely to step-up its efforts to weaken the currency. This could involve everything from jawboning to actual intervention in the FX market. The RBNZ hasn’t been shy about selling NZDs in the past and we expect it will closely monitor market conditions so it can pick the best time to dump more NZD on the market. Recently, the bank has favoured times of anticipated weak volumes as it maximizes the effectiveness of its operations in the FX market.
The kiwi
NZDUSD is looking weak both from a fundamental and technical perspective after today’s inflation figures. We outlined the fundamental weakness above – a decreasing chance of tighter monetary policy is bad news for the fragile kiwi – and technically the pair is looking primed to break out of its medium-term upward trend. RSI has broken out of similar trend and MACD has turned bearish very quickly. However, we would be cautious about getting too bearish before we witness a confirmed break of the channel shown below.
Source: FOREX.com
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