NZD dips as inflation expectations rise

The New Zealand dollar is down 0.38% on the day, as it trades at 0.6650 in the European session.

NZD/USD went for a ride on Thursday, rising close to 1% before retreating and giving up these gains. This was a common thread for most of the major currencies, as the US dollar softened after the hot US inflation report but managed to recover most of these losses by the end of the day.

RBNZ Inflation Expectations rises

New Zealand has not been immune to surging inflation. CPI climbed 5.9% in Q4 YoY, its highest level since 1990. The RBNZ Inflation Expectations survey indicated that consumers expect inflation to continue to rise. This finding is not surprising but will be of concern to the central bank since inflation expectations can manifest into actual inflation. The survey found that one-year ahead inflation expectations rose to 4.4% in Q4, up from 3.7% in Q3. For two years, consumers expected inflation at 3.27%, up from 2.96% previously.

The RBNZ has embarked on a series of rate hikes aimed at normalizing policy, and an increase in inflation expectations will add pressure on the central bank to tighten more aggressively in order to lower inflation to the bank’s target of 1%-3%. The bank holds a policy meeting on February 23^rd and is widely expected to hike rates. The recent hikes have been in increments of 25 basis points, but with no signs that surging inflation will ease anytime soon, policymakers may feel that a strong dose of medicine in the form of a half-point rise in rates is warranted.

In the US, inflation has reached 40-year highs and shows no signs of easing, raising speculation that the Fed will need to become more aggressive in its tightening. FOMC member Loretta Mester said on Wednesday that the Fed needed to act to tame inflation, but she didn’t see a compelling case to raise rates by a half-point at the March meeting. The markets disagree, however, and are bracing for a half-point move. CME’s FedWatch indicates has gauged the likelihood of a 0.50% hike in March at 96%, up from just 33% earlier in the week, before the hot US inflation report.

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NZD/USD Technical

• NZD/USD has support at 0.6541 and 0.6469
• 0.6685 is a weak resistance line, followed by 0.6757

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