New Zealand dollar eyes fourth-quarter inflation

• New Zealand’s inflation estimate for Q1 stands at 7.1%
• Fed’s Bostic expects one more rate hike
• NZD/USD showing limited movement

New Zealand inflation expected to remain above 7%

New Zealand releases inflation for the first quarter later today. It has been a light data week so far in both New Zealand and the US, which explains why NZD/USD is almost unchanged this week. That could change in a hurry following the inflation report, which should be treated as a market-mover.

Inflation has barely budged over the past few months, despite relentless interest rate hikes from the central bank. CPI came in at 7.2% y/y in both the third and fourth quarters of 2022 and is projected to inch lower to 7.1% in Q1. Reserve Bank of New Zealand Governor Orr can’t be blamed for not being aggressive against inflation, as he has raised rates to 5.25% in the current rate-hike cycle, the highest level amongst the major central banks.

The RBNZ shocked the markets earlier this month when it delivered a 50-basis point hike, as the markets had expected a modest 25-bp move, given a lackluster New Zealand economy. The oversize rate hike isn’t expected to have much impact on the upcoming inflation release. Economists will explain that it takes time for the rate hikes to percolate through the economy, but that is cold comfort for households who are struggling with rising mortgage payments but not seeing any improvement in red-hot inflation. The fight to contain inflation has been slow to show results and RBNZ policy makers will be hoping for a lower reading than the 7.1% consensus estimate.

In the US, the Fed is widely expected to raise rates next month, with an 84% probability according to the CME Group. On Tuesday, Fed member Bostic said that he expects one more rate hike in May and then a hold policy all the way into 2024. The markets are more dovish and anticipate rate cuts before the end of this year due to the economy continuing to weaken as the rate hikes make themselves felt and dampen economic activity.

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NZD/USD Technical

• NZD/USD is testing support at 0.6213. Below, there is support at 0.6127
• 0.6289 and 0.6368 are the next resistance lines

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