New Zealand Dollar weakens amid softer Q3 inflation data
- New Zealand Dollar falls after Q3 CPI inflation slowed to 3.7%, missing market forecasts.
- Inflation above the RBNZ target keeps expectations high for a rate hike next week.
- Weak US housing data and Fed rate uncertainties may limit further NZD/USD losses.
NZD/USD halts its five-day winning streak, trading around 0.5700 during European hours on Thursday. The pair has experienced a decline as the New Zealand Dollar (NZD) faces pressure from softer-than-expected inflation data. Figures released by Statistics New Zealand show that the Consumer Price Index (CPI) fell to 3.7% year-over-year in the third quarter, down from 4.1% in the previous period and slightly below market forecasts of 3.8%. On a quarterly basis, the CPI rose by 0.7%, reflecting a notable slowdown from the 1.5% increase recorded in the second quarter and missing expectations of 0.8%.
Despite the easing figures, New Zealand’s inflation rate remains above the upper limit of the Reserve Bank of New Zealand’s (RBNZ) target range. This persistent inflation reinforces expectations of further monetary tightening, with markets currently pricing in nearly a 98% chance of an interest rate hike at the upcoming meeting and a 100% probability of 50 basis points in total rate hikes by the end of February.
NZ inflation backdrop keeps RBNZ tightening bias and supports the Kiwi
Strategists at Brown Brothers Harriman highlight that “above target inflation argues for additional RBNZ rate hikes and offers NZD support,” noting that market pricing remains firmly aligned with further tightening. They point out that “the swaps curve prices in 80% odds of a 25bps RBNZ rate hike to 3.00% on October 28,” underscoring expectations that the central bank will continue normalizing policy in response to persistent price pressures.
Meanwhile, downside pressure on the NZD/USD pair could be limited as the US Dollar (USD) continues to struggle with signs of economic weakness in the United States. Recent reports showed a pullback in September housing starts alongside pending home sales dropping to an all-time low. Furthermore, according to the CME FedWatch Tool, traders are anticipating an 87% probability that the Federal Reserve will hold interest rates steady next week and an 86% chance of a rate hike in December, though uncertainty remains elevated after Fed Chair Kevin Warsh avoided giving explicit guidance on future rate adjustments.
New Zealand Dollar FAQs
The New Zealand Dollar (NZD), also known as the Kiwi, is a well-known traded currency among investors. Its value is broadly determined by the health of the New Zealand economy and the country’s central bank policy. Still, there are some unique particularities that also can make NZD move. The performance of the Chinese economy tends to move the Kiwi because China is New Zealand’s biggest trading partner. Bad news for the Chinese economy likely means less New Zealand exports to the country, hitting the economy and thus its currency. Another factor moving NZD is dairy prices as the dairy industry is New Zealand’s main export. High dairy prices boost export income, contributing positively to the economy and thus to the NZD.
The Reserve Bank of New Zealand (RBNZ) aims to achieve and maintain an inflation rate between 1% and 3% over the medium term, with a focus to keep it near the 2% mid-point. To this end, the bank sets an appropriate level of interest rates. When inflation is too high, the RBNZ will increase interest rates to cool the economy, but the move will also make bond yields higher, increasing investors’ appeal to invest in the country and thus boosting NZD. On the contrary, lower interest rates tend to weaken NZD. The so-called rate differential, or how rates in New Zealand are or are expected to be compared to the ones set by the US Federal Reserve, can also play a key role in moving the NZD/USD pair.
Macroeconomic data releases in New Zealand are key to assess the state of the economy and can impact the New Zealand Dollar’s (NZD) valuation. A strong economy, based on high economic growth, low unemployment and high confidence is good for NZD. High economic growth attracts foreign investment and may encourage the Reserve Bank of New Zealand to increase interest rates, if this economic strength comes together with elevated inflation. Conversely, if economic data is weak, NZD is likely to depreciate.
The New Zealand Dollar (NZD) tends to strengthen during risk-on periods, or when investors perceive that broader market risks are low and are optimistic about growth. This tends to lead to a more favorable outlook for commodities and so-called ‘commodity currencies’ such as the Kiwi. Conversely, NZD tends to weaken at times of market turbulence or economic uncertainty as investors tend to sell higher-risk assets and flee to the more-stable safe havens.
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