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New Zealand Dollar Jumps as Inflation Expectations Do The Same

New Zealand Dollar Jumps as Inflation Expectations Do The Same

David Cottle, Analyst

Talking Points:

  • The New Zealand Dollar made its Friday highs on news that inflation expectations had risen
  • However, the central bank has previously said that consumer prices are in a variable phase
  • Markets still think the next interest-rate move will be up, but possibly not soon

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The New Zealand Dollar got a rapid lift to session highs against its US cousin Friday on news that domestic inflation expectations had risen sharply.

Second-quarter data from the Reserve Bank of New Zealand found expectations of a 1.92% annualized Consumer Price Index rise one year from now. This was well above the 1.56% recorded in the first three months of 2017.

Two years from now CPI is expected to be rising at 2.17%, again above the 1.92% of the previous survey. Overall these are the highest expectations since the third quarter of 2014. The current CPI rate is 2.2%, itself the highest since late 2011.

By contrast New Zealand’s key Official Cash Rate remains at the record-low of 1.75% where is has lain since November 2016. The RBNZ’s official target is to keep inflation between one and three percent over the medium term.

The Kiwi Dollar has seen a bit more international focus since last month when official CPI data beat expectations.

In March the RBNZ said that CPI is likely to be variable over the coming year, but that it expects a return to the midpoint of the target band over the medium term. Governor Graeme Wheeler also said that monetary policy will remain accommodative for a “considerable period,” thanks to multiple economic uncertainties, many of them international.

Still, NZD/USD rose to 0.68876 after the data, from 0.68673 before it. It didn’t hold on to its highs for long however.

Spot the data release: NZD/USD

This is probably not surprising given the central bank’s commentary. It will as ever take more than a few data points to change the dial on policy expectations, although futures markets currently suggest a rate increase within twelve months is very likely.

--- Written by David Cottle, DailyFX Research

Contact and follow David on Twitter: @DavidCottleFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.