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New Zealand Dollar Drops as CPI Data Reduces RBNZ Rate Hike Bets

New Zealand Dollar Drops as CPI Data Reduces RBNZ Rate Hike Bets

Daniel Dubrovsky, Strategist

Talking Points:

  • New Zealand CPI 1.6% y/y in Q4 2017 versus 1.9% expected, m/m data was also weaker
  • The New Zealand Dollar declined against its major counterparts during early Asia trade
  • Softer inflation data, which went against RBNZ’s outlook, reduced near-term rate hike bets

Just started trading NZD/USD? See our beginner guides to help build your strategy!

The New Zealand Dollar declined against its major counterparts during early Thursday’s Asia trading session. The culprit was a set of softer inflation figures. In the fourth quarter of 2017, prices rose only 1.6% y/y and 0.1% q/q from 1.9% and 0.5% in the third quarter respectfully. Economists were expecting CPI to remain more or less unchanged.

This unexpected outcome seemed to have reduced near-term RBNZ interest rate hike expectations. Keep in mind, the markets are pricing in a 60% chance that the central bank will raise its official cash rate at least once this year. Indeed, local government bond yields fell simultaneously as the data crossed the wires.

If you look at the Reserve Bank of New Zealand’s inflation projections from its latest monetary policy announcement, they forecasted prices hitting 2 percent a lot sooner. Today’s worse-than-expected data seems to have put inflation heading in the wrong direction.

New Zealand Dollar Drops as CPI Data Reduces RBNZ Rate Hike Bets

On a daily chart, NZD/USD continues pushing higher since completing an inverse head and shoulders pattern in mid-December. Since then, the pair has climbed more than 8.5%. In addition, the pair seems to have formed a shooting star candlestick following the weaker inflation outcome.

Such a candle is a sign of indecision that may turn out to be a bearish signal. However, it does need follow-through for confirmation. From here, the 76.4% Fibonacci retracement around 0.7374 stands in way as immediate resistance. A push above that will expose the July 27th high at 0.7558.

Meanwhile the rising trend line from early December stands in way as close support. A break below that will expose the 61.8% level around 0.7261.

New Zealand Dollar Drops as CPI Data Reduces RBNZ Rate Hike Bets

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