Could the RBNZ resume its tightening cycle anytime soon?
New Zealand’s quarterly CPI release may have some clues!
Focus on the event:
New Zealand Consumer Price Index (CPI) and inflation data for the second quarter of 2023
When will it be released:
July 18, 2023 (Tuesday), 10:45 PM GMT
Use our forex market hours tool to convert GMT to your local time zone.
Expectations:
- Core CPI QoQ: +0.9% expected vs. +1.2% prior
Related data since the last data event/release:
- Food price index It jumped 1.6% month over month in June, after meager gains of 0.3% and 0.5% in May and April, respectively.
- ANZ commodity prices It fell 2.3% month over month in June, after rising 0.4% in May and falling 1.7% in April.
- product input prices It posted a dismal 0.2% qoq in the first quarter versus estimates of 0.5%, product production prices Up 0.3% sequentially versus an expected gain of 0.8%.
- Reserve Bank of New Zealand survey of inflation expectations Show that estimates for the next year decreased from 5.11% to 4.28% for the next two years and decreased from 3.30% to 2.79%
- Indy labor costx decreased from 1.1% to 0.9% qoq in the March 2023 quarter vs. no change estimates
Previous issues and the impact of the risk environment on the New Zealand dollar
April 19, 2023
Event Results/Price Action:
New Zealand’s CPI for the first quarter fell from 1.4% to 1.2% qoq versus the expected increase to 1.5%, dampening hopes of a tightening RBNZ as energy prices tumble.
Prior to that, the RBA and Bank of Canada paused rate hikes, prompting New Zealand traders to take a similar decision from the RBNZ now that inflationary pressures have slowed.
The New Zealand dollar, which tested highs for the week ahead of Wednesday’s CPI release, quickly reversed gains after seeing the actual numbers and ended up as the second weakest major currency for the week.
Risk Environment and Internal Market Behaviors:
Inflation and monetary policy bias were in the spotlight throughout the week, with CPI and jobs numbers from major economies on the docket.
Although most CPI releases indicated a slowing in price pressures, upbeat employment data and a handful of PMIs indicated a prolonged period of higher borrowing costs, spurring risk-off flows on recession fears.
However, safe-haven assets and lower-yielding currencies were stronger while riskier bets gave up ground easily.
January 24, 2023
Event Results/Price Action:
NZD overlay against major currencies Planned by TV
New Zealand CPI for Q4 2022 came in slightly stronger than expected at 1.4% versus the expected 1.3% increase. However, this was slower than the previous jump of 2.2% qoq in price levels.
Surprisingly, the New Zealand dollar didn’t have much bullish reaction to the upbeat headline readings, even falling against the Australian dollar a few hours later when Australia posted much stronger-than-expected CPI data.
As it turns out, New Zealand’s annual CPI reading was still below the central bank’s forecast of 7.5% because it only came in at 7.2% in the fourth quarter of the previous year. With that said, the Kiwis mostly moved sideways against their peers for the rest of the week.
Risk Environment and Internal Market Behaviors:
This was a busy trading week in terms of economic stimulus, marked by a host of top notch inflation releases, the Bank of Canada decision, and the advanced US GDP release.
However, price action was relatively subdued, as major financial centers in Asia were closed for the Lunar New Year holiday. Some improvements in early released PMI readings kept risk appetite supported, although some numbers still point to deflationary conditions.
Expectations of a slower pace of rate hikes from the Federal Reserve also helped support riskier assets, as this eased traders’ recession fears.
Price action odds:
Possibilities of feeling risky:
Traders seem to be on the safe side this week so far, as the latest data dump out of China mostly fell short of expectations, particularly when it comes to GDP growth.
Today’s US Retail Sales report is likely to shift bias as a weaker-than-expected/previous reading likely sparked sentiment that lower prospects of further Fed rate hikes should be priced in. This was marked by the rise of anti-dollar assets, particularly in stocks, gold and oil during the US morning session.
Barring any major news events leading up to the NZD CPI event, traders are likely to be USD/Risk oriented until Wednesday.
New Zealand dollar scenarios:
Possible base scenario:
Another drop in quarterly CPI (current expected scenario) could reinforce the view that the RBNZ’s aggressive hawkishness is in effect and that the central bank is likely to remain in hand for a while longer.
Key indicators such as inflation expectations, which tend to have a self-fulfilling effect, as well as the PPI and FPI numbers also point to weak price pressures. Note that RBNZ policy makers have confirmed that domestic inflation is slowing and that they do not expect major changes to OCR in the near future.
With that said, the New Zealand dollar could be poised for sharp declines, especially if risk aversion spills over into the markets. In this case, look for potential NZD shorts against currencies with more hawkish central banks, such as the euro and pound. The Aussie cross currency scenario may also be viable given the wide range of risk at the moment.
Possible alternative scenario:
A stronger-than-expected CPI reading may be enough to revive the RBNZ’s hawkish hopes, especially as the current annual rate remains flat. waaay Above the inflation target of 1-3% for the central bank.
Keep in mind that the number-crunchers from ANZ and Westpac have noted that housing costs, especially when it comes to rent, and higher prices for groceries and prepared food items may still put upward pressure on consumer inflation.
Market watchers can also focus on “non-tradable inflation” which may remain high and enough to pressure a 0.25% interest rate hike before the end of the year.
If the underlying components of inflation point to stubborn price pressures and risk appetite picks up, the New Zealand dollar could have an opportunity to rally against currencies with relatively dovish central banks like the Japanese yen, especially if risk sentiment is broad at the time of the release.
One thing to consider in either of the above scenarios is positioning, as NZD traders have dumped the currency hard during the Asian trading session on Tuesday. This may limit further selling potential, but again, we’ll just have to see where the NZD CPI data has landed before considering the degree of shift/volatility bias in the NZD pairs.