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NZD/USD Risks Fresh Record-Highs Ahead of RBNZ on Faster Inflation

Fundamental Forecast for Pound:Bullish

The NZD/USD remains at risk of marking fresh record-highs ahead of the next Reserve Bank of New Zealand (RBNZ) policy meeting on July 23 as the economic docket is expected to show heightening price pressures across the region.

Indeed, the headline reading for New Zealand inflation is expected to increase an annualized 1.8% in the second-quarter, which would mark the fastest pace of growth since the last three-months of 2011, and heightening price pressures may generate a further advance in the exchange rate as it fuels interest rate expectations. According to Credit Suisse overnight index swaps, market participants are pricing a 90% chance for another 25bp rate hike in July, but we may see the RBNZ take a more aggressive approach in normalizing monetary policy as the stronger recovery raises the risk for inflation.

RBNZ Assistant Governor John McDermott warned that the central bank will aim for ‘low and stable inflation’ as the central bank raises its outlook for growth, and the stronger recovery should continue to heighten the appeal of the New Zealand dollar, especially as Fitch Ratings raising its credit rating outlook for the region. With that said, the positive developments coming out of the region may continue to limit the downside risk for the NZD/USD, and we may see the RBNZ do little to halt the advance in the local currency as it helps the central bank to achieve price stability.

As a result, we will retain a bullish outlook for the NZD/USD as it approaches the 2011 high (0.8841), and we will continue to look for opportunities to ‘buy dips’ ahead of the RBNZ interest rate decision should the inflation report further boost interest rate expectations.