New Zealand dollar extends gains

New Zealand dollar up over 3% this week

The New Zealand dollar’s rally continues. NZD/USD has reeled off four straight winning sessions and has enjoyed a superb week, climbing 3.14%. The US dollar’s woes continue and the kiwi has taken full advantage.

The story of the week has been the US inflation report, as July’s headline CPI surprised the markets with a lower-than-expected reading of 8.5%. This was below the forecast of 8.7% and much lower than the June reading of 9.1%. The markets seized on the numbers as a possible indication that the Fed will pivot and ease up on rates. This sent the US dollar tumbling against the majors on Wednesday, with NZD/USD climbing 1.85%.

It’s true that the lower inflation release gives the Fed some leeway when it comes to the next meeting in September. The CME’s FedWatch has the odds of a 50 basis point hike at 63.5%, while a 75bp increase stands at 36.5%. Still, it is far too early to talk about the end of the rate-tightening cycle, and one reading is not sufficient to determine if inflation has peaked. This has been the message from Fed officials following the inflation report. Minneapolis Fed President Kashkari said that the Fed was “far, far away from declaring victory” over inflation, and Chicago Fed President Evans said that inflation remained “unacceptably” high. With the Fed looking to increase the benchmark rate to 4% or higher by the end of 2023, some of the market exuberance over the drop in inflation is bound to dissipate.

In New Zealand, Inflation Expectations dropped to 3.07% in Q2, down from 3.27% in Q1. This was the first deceleration in over two years, and will raise hopes that inflation may be easing. However, the Food Price Index jumped to 2.1% in the second quarter, up from 1.2% in Q1. Food is a volatile consumer price item, and we’ll have to wait and see if the index continues to rise or if this sharp gain was a one-time spike.

The week wraps up with UoM Consumer Sentiment, a key confidence indicator. With US consumers hammered by soaring inflation and rising mortgage payments, it’s no surprise that the index has tumbled – falling from 65.7 in March to just 51.5 in June. This points to weak expansion, just above the neutral 50.0 line. The July forecast calls for a slight improvement to 52.5 points.

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NZD/USD Technical

• NZD/USD is testing resistance at 0.6410. Above, there is resistance at 0.6495
• There is support at 0.6326 and 0.6227

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