New Zealand Dollar Elevated by Rate Hike Risk. Will NZD/USD Rally Continue?

New Zealand Dollar, NZD/USD, RBNZ, CPI, US Dollar, AUD/NZD – Talking Points

• The New Zealand Dollar has firmed after CPI data beat expectations
• The figures reveal price pressures took off in the 3rd quarter despite higher rates
• All eyes are now on the RBNZ. If they hike aggressively, will that boost NZD/USD?

The New Zealand Dollar has been steadily climbing since hotter than expected inflation data crossed the wires earlier today.

The inflation figures showed headline CPI for the third quarter hit 2.2%, way above forecasts of 1.5% and well clear of 1.7% seen over the second quarter.

This put year-on-year New Zealand CPI running at 7.2% to the end of September, just below the prior reading of 7.3%, which was the highest in 30 years. A Bloomberg survey of economists were anticipating 6.5% for the annual number.

NZD/USD REACTION TO CPI DATA

Chart created in TradingView

Of concern for the Reserve Bank of New Zealand (RBNZ) is the re-acceleration in price pressures and this may see a recalibration of rate hikes going forward. The slight dip in the annual number is due to a miniscule downward revision, not an easing of inflation duress.

Earlier this month, the central bank lifted their official cash rate from 3.0% to 3.50% as the market had anticipated.

After today’s figures, the market is leaning toward a potential 75 basis points (bps) tightening with 70 bps now priced into the Index Overnight Swap (OIS) calculations. The next RBNZ meeting in on the 23rd of November and several New Zealand based economists have also raised their forecasts to a 75 bps lift at that gathering.

A move of such magnitude would bring the RBNZ into lock step with the Federal Reserve. They are forecasts to raise their target rate by 75 bps at their 2nd November conclave. The Fed’s aggressive hiking cycle has helped to underpin the US Dollar throughout 2022.

The outlook for NZ rates stands in contrast to Australia’s Reserve Bank where they appear to be shying away from their own inflation fight. The RBA raised rates by 25 bps at their meeting earlier this month, rather than 50 bps forecast.

The RBA will get their third quarter CPI data on the 26th of October, ahead of the monetary policy committee meeting on the 1st November. The apparent divergence in policy has seen AUD/NZD move lower today.

Looking ahead, NZ trade data will be released on Friday and could be another driver of NZD/USD price action.

— Written by Daniel McCarthy, Strategist for DailyFX.com

Please contact Daniel via @DanMcCathyFX on Twitter