New Zealand dollar extends rally

NZD/USD was up sharply earlier in the day but has pared most of those gains. In the North American session, the New Zealand dollar is trading at 0.5663, up 0.49%.

New Zealand inflation higher than expected

New Zealand inflation jumped 2.2% MoM in the third quarter, higher than the estimate of 1.6%. On an annualized basis, inflation climbed 7.2% in Q3, down from 7.3% in Q2 but well above the consensus of 6.6%. Inflation remains stubbornly high and is running strong across the economy. Core inflation is not showing any signs of easing, despite the central bank’s sharp rise in interest rates, with most core inflation measures topping 6%. Domestic demand is holding up, driven by a robust labour market and firm consumer spending.

With no indication that inflation is peaking, the Reserve Bank of New Zealand is expected to continue raising rates, perhaps as high as 5.0%, until inflation is finally brought under control. The cash rate is currently at 3.5%, and a 0.75% hike at the November meeting is a strong possibility. It will be difficult for the central bank to guide the economy to a soft landing if it continues to deliver oversize hikes, but so far the economy has shown strong resilience despite the Bank’s sharp tightening.

The outlook for the New Zealand dollar does not look promising. September was a disaster for the New Zealand dollar, which plunged a staggering 8.5%. Last week, NZD/USD slipped to 0.5510, its lowest level since March 2020. The risk-sensitive currency faces significant headwinds. The escalating conflict in Ukraine, which has seen President Putin annex 15% of Ukrainian territory, a likely energy crisis in Europe this winter and a hawkish Federal Reserve are likely to continue weighing on the New Zealand dollar in the short term.

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NZD/USD Technical

• NZD/USD is testing resistance at 0.5657. Next, there is resistance at 0.5754
• There is support at 0.5584 and 0.5487

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