NZ dollar rises despite rate cut expectations and high inflation

July 17, 2024

Key points:

• New Zealand’s CPI rose 0.4% in Q2, below the forecast of 0.5%.
• Annual inflation slowed to 3.3%, down from 4.0% in the previous quarter.

The New Zealand dollar strengthened on Wednesday as domestically-driven inflation remained high, though headline figures eased to a three-year low. Despite this, markets continue to expect around three rate cuts by the end of the year.

See: Kiwi on the rise, trading at 0.60744 as seen on the VT Markets app.

New Zealand’s consumer price index (CPI) rose by 0.4% in the second quarter, slightly below the forecast of 0.5%. Annual inflation also slowed to 3.3%, down from 4.0% in the previous quarter, which was below the central bank’s expectation of 3.6%.

Also read: Australian and NZ dollars rise against the yen but fall against the dollar 

Non-tradable inflation slightly eases but remains above RBNZ forecast

However, non-tradable inflation, which focuses on domestic goods and services, remained high at 5.4%, just above the Reserve Bank of New Zealand’s (RBNZ) forecast of 5.3%, though it did ease from 5.8% in the previous quarter.

The New Zealand dollar (NZDUSD) gained 0.4% to $0.6074, recovering its overnight losses against a strong US dollar. The currency faces resistance at the 200-day moving average of $0.6077.

Markets anticipate rate cuts following steady inflation report

Overall, the inflation report presented no major surprises. Following the RBNZ’s dovish shift last week, markets are pricing in a total easing of 70 basis points by year-end, with the first rate cut potentially happening as early as next month. 

The Australian dollar (AUDNZD) lost 0.5% to NZ$1.1075, moving away from a 20-month peak of NZ$1.1141 hit the previous day. It had been gaining on the kiwi due to a popular trade playing the policy divergence between Australia and New Zealand. Against the greenback, the Australian dollar (AUDUSD) remained flat at $0.6730, having fallen 0.4% overnight to as low as $0.6712. Support is around $0.6714, while resistance is at the six-month top of $0.6798.

Local bonds rally on Fed rate cut expectations

Local bonds rallied alongside US Treasuries on expectations that the Federal Reserve is nearing a point where it will cut interest rates. The three-year Australian bond yield (AU3YT=RR) slipped 2 basis points to 3.968%, the lowest level in three weeks, while the 10-year yield eased 4 basis points to 4.212%, also the lowest since late June.

As markets digest these developments, the outlook for both the New Zealand and Australian dollars remains closely tied to upcoming monetary policy decisions and global economic trends.

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