NZD/USD: Inflation the only barrier between the RBNZ and rate cuts

Inflation remains key sticking point preventing interest rate cuts from the Reserve Bank of New Zealand, ensuring Wednesday’s first quarter consumer price inflation report will be closely watched by financial markets, especially should it print on the softer side of expectations.

What is the data expected to show?

Inflation is expected to increase 0.6% in the March quarter, a slight acceleration from the 0.5% pace recorded in the three months to December. The year-on-year rate is expected to slow to 4% as stronger inflation prints from a year earlier exit the data series.

A 0.6% quarterly increase would double the 0.3% pace forecast by the RBNZ, a discrepancy largely explained by the softer New Zealand dollar and higher energy prices over the past two months. As such, it’s year-on-year forecast of 3.8% is likely to be exceeded, leaving inflation above the 2% midpoint of its 1-3% target band.

Like other developed central banks, the RBNZ puts greater weight on underlying inflation readings that remove large, one-off price movements. The average of core readings have eased over the past year, sliding to 4.1% in Q4 2023, well off the 6.7% pace hit in 2022.

The RBNZ’s preferred underlying inflation indicator, its sectoral factor model, will be released at 2pm in Wellington, later than Statistics New Zealand’s survey at 8.45am. The former can and does move New Zealand financial markets.

New Zealand in double-dip recession

While price pressures may not have eased sufficiently to warrant rate cuts, remaining New Zealand economic data has been undeniably weak. The economy entered a double-dip recession in the second half of 2023 with soft data such as the NZIER Business survey and Business NZ Performance of Services Index (PSI) pointing to even weaker outcomes at the end of the March quarter.

The PSI fell so dramatically that it left the index at levels not seen outside of periods of financial and economic turmoil.

Source: Refinitiv

Given the weakness in the economy, it suggests risks for domestic price pressures may be skewed to the downside in the March quarter inflation report.

Markets, economists expect rate cuts soon

Markets and economists believe the RBNZ will begin cutting rates in either the September or December quarter, earlier than the mid-2025 view offered by the RBNZ in February. While markets have pared rate cut bets following similar moves in the US, the RBNZ is a central bank with a track record of going its own way on rates, meaning it will move if deemed necessary even if the Fed doesn’t.

NZD/USD hammered on US rate recalibration, geopolitics

NZD/USD has seen better days, tumbling to the lowest level since November on the back of widening interest rate differentials with the United States, geopolitical tensions and volatility in riskier asset classes. Given the prevailing sentiment, it suggests an inflation undershoot may deliver the greatest impact on the Kiwi as it would be going with the trend rather than against it.

On the downside, support is located at .5860 and again at .5800, with little else to speak of until you get back into the mid 50 cent region. On the topside, the intersection of horizontal resistance at .5950 and former uptrend support above may prove tough to crack near-term. Beyond, .6083 is the next upside target, although that appears unlikely to be revisited any time soon without a dramatic shift in prevailing sentiment.

-- Written by David Scutt

Follow David on Twitter @scutty

How to trade with City Index

You can trade with City Index by following these four easy steps:

Open an account, or log in if you’re already a customer

• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
Search for the market you want to trade in our award-winning platform
Choose your position and size, and your stop and limit levels
Place the trade

This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.

StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.

In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.

StoneX Financial Pte. Ltd. is not under any obligation to update this report.

Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit www.cityindex.com/en-sg/terms-and-policies for the complete Risk Disclosure Statement.

ALL TRADING INVOLVES RISKS. LOSSES CAN EXCEED DEPOSITS.

City Index is a trading name of StoneX Financial Pte. Ltd. (“SFP”) for the offering of dealing services in Contracts for Differences (“CFD”). SFP holds a Capital Markets Services Licence issued by the Monetary Authority of Singapore for Dealing in Exchange-Traded Derivatives Contracts, Over-the-Counter Derivatives Contracts, and Spot Foreign Exchange Contracts for the Purposes of Leveraged Foreign Exchange Trading. SFP is also both Derivatives Trading and Clearing member of the Singapore Exchange (“SGX”). SFP is a wholly-owned subsidiary of StoneX Group Inc.

The information provided herein is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to invest, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently, any person acting on it does so entirely at their own risk.

The information does not represent an offer of, or solicitation for, a transaction in any investment product. Any views and opinions expressed may be changed without an update. To understand the risks and costs involved, please visit the section captioned “Important Information” and the “Risk Disclosure Statement”.

The information herein is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

StoneX Financial Pte. Ltd. 1 Raffles Place, #18-61, One Raffles Place Tower 2, Singapore 048616. Tel: 6309 1000. Co. Reg. No.: 201130598R.

This advertisement has not been reviewed by the Monetary Authority of Singapore.