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New Zealand Dollar Gains on CPI Beat, But Excitement Fizzles

New Zealand Dollar Gains on CPI Beat, But Excitement Fizzles

2017-10-16 23:05:00
Daniel Dubrovsky, Analyst
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Talking Points:

  • New Zealand CPI beat expectations on the year-over-year and quarter-over-quarter fronts
  • The New Zealand Dollar enjoyed an immediate and rapid boost versus the major currencies
  • Follow-through was less exciting as the markets weighed the outcome against RBNZ rate hike bets

Have a question about why the New Zealand Dollar did what it did? Join a Q&A webinar and ask it live!

The New Zealand Dollar enjoyed an immediate and rapid boost against its major counterparts as third quarter CPI data crossed the wires. The yearly measurement clocked in at 1.9% versus 1.8% expected and 1.7% from previously. The quarterly figure also beat estimates at 0.5% versus 0.4% forecasted and 0.0% in the second quarter.

Even though the headline on-year inflation rate is now 0.1% away from the RBNZ’s 2 percent target midpoint, excitement for the Kiwi Dollar’s rally quickly fizzled as it lost some ground in the immediate aftermath. Taking a closer look at the Reserve Bank of New Zealand’s monetary policy statement might help understand why.

In September, the central bank left rates unchanged and expressed its desire for a lower trade-weighted exchange rate. This is mainly because of its effect on tradables inflation. The RBNZ expected headline inflation to decline going forward as a result of the relatively-higher New Zealand Dollar.

However, this was not the case today. Inflation is slowly heading in the opposite direction of what the central bank expects. But, it is not at the midpoint target quite yet. Perhaps the pressure for the central bank to act is not as pressing compared to a significantly higher CPI outcome. After all, acting Governor Grant Spencer said that policy may need to adjust accordingly. So perhaps some caution is warranted.

Even so, front-end New Zealand government bond yields did rally when the inflation data was released. This hints that the CPI figures moved RBNZ policy bets towards the hawkish side of the spectrum to some extent. Overnight index swaps are pricing in a better-than-even chance of a rate hike by the Reserve Bank of New Zealand’s September 2018 policy announcement.

New Zealand Dollar Gains on CPI Beat, But Excitement Fizzles

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