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NZD/USD to Eye 0.8750 Ahead of RBNZ on Faster New Zealand Inflation

NZD/USD to Eye 0.8750 Ahead of RBNZ on Faster New Zealand Inflation

David Song, Gregory Marks,

- New Zealand Consumer Price Index (CPI) to Rise for Third Consecutive Quarter

- Headline Reading Inflation of 1.7% Would Mark Fastest Pace of Growth Since 4Q 2011

Trading the News: New Zealand Consumer Price Index

Another uptick in the headline reading for New Zealand inflation may trigger fresh highs in the NZD/USD as it puts increased pressure on the Reserve Bank of New Zealand (RBNZ) to normalize monetary policy sooner rather than later.

What’s Expected:

NZDUSD-to-Eye-0.8750-Ahead-of-RBNZ-on-Faster-New-Zealand-Inflation_body_ScreenShot094.png, NZD/USD to Eye 0.8750 Ahead of RBNZ on Faster New Zealand Inflation

Why Is This Event Important:

Indeed, RBNZ Governor Graeme Wheeler may adopt a more hawkish tone for monetary policy amid the persistent threat for an asset-bubble, and the central bank head may continue to deliver a series of rate hikes throughout 2014 as the stronger recovery raises the outlook for growth and inflation.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

REINZ House Price Index (MoM) (MAR)

--

3.4%

Employment Change (QoQ) (4Q)

0.6%

1.1%

Private Wages ex Overtime (QoQ) (4Q)

0.5%

0.6%

Rising home prices paired with the pickup on wage growth may heighten price pressures in New Zealand, and a marked uptick in inflation may spur a bullish reaction in the NZD/USD as it boosts interest rate expectations.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

ANZ Consumer Confidence (MoM) (MAR)

--

-0.8%

Retail Sales ex Inflation (QoQ) (4Q)

1.7%

1.2%

Producer Price Index- Output (QoQ) (4Q)

--

-0.4%

Nevertheless, lower input costs along with the slowdown in household spending may drag on consumer prices, and a dismal CPI print may trigger a larger correction in the New Zealand dollar as dampens the fundamental outlook for the region.

Join DailyFX on Demand to Cover Current New Zealand dollar Trade Setups

How To Trade This Event Risk(Video)

Bullish NZD Trade: Consumer Prices Climb 1.7% or Greater

  • Need green, five-minute candle following the release to consider a long NZD/USD trade
  • If market reaction favors a long New Zealand trade, buy NZD/USD with two separate position
  • Set stop at the near-by swing low/reasonable distance from cost; look for at least 1:1 risk-to-reward
  • Move stop to entry on remaining position once initial target is met, set reasonable limit

Bearish NZD Trade: Headline Inflation Disappoints

  • Need red, five-minute candle to favor a short NZD/USD trade
  • Implement same strategy as the bullish New Zealand dollar trade, just in opposite direction

Potential Price Targets For The Release

NZDUSD Daily

NZDUSD-to-Eye-0.8750-Ahead-of-RBNZ-on-Faster-New-Zealand-Inflation_body_Picture_2.png, NZD/USD to Eye 0.8750 Ahead of RBNZ on Faster New Zealand Inflation

Daily Chart - Created Using FXCM Marketscope 2.0

  • Retails Upward Trending Channel From February; Higher High in Place?
  • Bearish RSI Divergence Warns of Larger Correction Ahead
  • Interim resistance: 0.8750-60 (78.6% expansion)
  • Interim support: 0.8430 (23.6 retracement) to 0.9460 (38.2 expansion)

Impact that the New Zealand CPI print has had on NZD during the last quarter

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

4Q 2013

01/20/2014 21:45 GMT

1.5%

1.6%

+80

+65

4Q 2013 New Zealand Consumer Price Index

NZDUSD-to-Eye-0.8750-Ahead-of-RBNZ-on-Faster-New-Zealand-Inflation_body_Picture_1.png, NZD/USD to Eye 0.8750 Ahead of RBNZ on Faster New Zealand Inflation

Higher than expected inflation data out of New Zealand last quarter sent the Kiwi higher by almost 100 pips and later prompted the Reserve Bank of New Zealand to hike rates 25bps as market participants expected at the last meeting. This data is crucial as to whether market participants will continue to justify holding one of the most expensive currencies in the FX market. Rate hikes in excess of 100bps are currently priced in and if the Kiwi is to maintain such strength, higher inflation data will have to follow. If we see any miss here in the QoQ figures, NZD crosses may come under pressure.

--- Written by David Song, Currency Analyst and Gregory Marks

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

To be added to David's e-mail distribution list, please follow this link.

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