NZD: RBNZ still on course to deliver one final rate cut - MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the high yielding currencies of the Australian and New Zealand dollars have outperformed in the Asian trading session supported by the dovish speech from Fed Chair Yellen on Friday and recent softening of US economic data releases.

Key Quotes

“The New Zealand dollar has also benefitted overnight from the release of latest inflation report from New Zealand which proved firmer than expected prompting some dampening of RBNZ rate cut expectations. Still, the report revealed that the annual rate of headline inflation slowed to just 0.2% in Q3 which was in line with the RBNZ’s prior forecasts. We believe that the low inflation print is still consistent with recent RBNZ rhetoric signalling that that they are likely to lower their key policy rate further in November. As a result, the scope for the kiwi to strengthen further in the near-term on the back of today’s CPI report should prove limited.

However, it is likely that inflation has now reached a low point and is expected to head higher in the coming quarters. In that respect it was encouraging that core inflation measures held steady or increased marginally in Q3. The annual rate of CPI excluding food and energy accelerated to 1.1% in Q3 from 1.0% in Q2. The RBNZ would like to see more evidence that inflation pressures are picking up before bringing an end to their easing cycle. It should prove more difficult for the RBNZ to continue lowering rates next year offering more domestic support for the kiwi in the year ahead, although it will remain sensitive to external developments. The risk of tighter global financial market conditions could undermine the appeal of carry trades.”