New Zealand dollar extends rally

NZD/USD continues to gain ground and is higher for a third straight day. In the North American session, the New Zealand dollar is trading at 0.5865, up 0.60%.

Business confidence drops

The ANZ Business Outlook Survey for October, released yesterday, painted a grim picture of the health of the New Zealand economy. Business confidence fell to -42.7, down from -36.7 in September. The last time that business confidence was in positive territory was in May 2021, meaning that the lack of any optimism by businesses is nothing new. What does give cause for worry is the rise in inflation expectations, which rose to 6.13%, up slightly from 5.98% in September.

The uptick in inflation expectations is clearly linked to the rise in inflation for Q3, which came in at 7.2% YoY in Q3, after a 7.3% gain in Q2. This was higher than the consensus of 6.6%. On a quarterly basis, CPI jumped 2.2%, up from 1.7% and much higher than the consensus of 1.6%. This nasty surprise means that the Reserve Bank of New Zealand will likely respond with an oversize hike of 0.75% at the November 23^rd meeting.

The cash rate is currently at 3.5% and the hot inflation report has analysts projecting that the cash rate won’t peak until 5.0% or even higher in early 2023. It’s difficult to see how such a steep rate-tightening cycle will not trigger a recession, but the Reserve Bank appears to have little choice but to remain aggressive, given that the Bank is further behind inflation than it had expected. What is especially troubling about inflation is that it remains broad-based and core inflation continues to move higher.

In the US, third-quarter GDP roared back at 2.6%, following two consecutive quarters of negative growth, which technically met the definition of a recession and garnered lots of headlines. This was higher than the 2.4% consensus and indicates that the economy is in good shape. What is less encouraging is that consumer spending has slowed, with personal consumption rising by 1.4%, down from 2.0% in Q2.

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NZD/USD Technical

• NZD/USD is testing resistance at 0.5835. Next, there is resistance at 0.5912
• There is support at 0.5774 and 0.5616

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