New Zealand dollar shrugs as inflation expectations dip

• Inflation expectations ease to a two-year low

The New Zealand dollar is slightly lower on Wednesday. In the European session, NZD/USD is trading at 0.5924, down 0.19%.

NZ inflation expectations dip

New Zealand’s inflation rate has been dropping, albeit slowly. Inflation fell to 5.6% in the third quarter, down from 6.0% in Q4. The downward trend is certainly encouraging for the Reserve Bank of New Zealand but policy makers are also concerned about inflation expectations and not just the latest inflation numbers.

Inflation expectations are a primary driver of inflation and the central bank needs to ensure that high inflation expectations don’t get anchored; otherwise, the battle against inflation will become that much more difficult.

The fourth-quarter release was positive, as inflation expectations fell to 2.76%, down from 2.83% in Q3 and its lowest level in two years. As we saw with inflation data, the direction is downward, but slowly.

The RBNZ held rates for a third straight time at the October meeting, leaving the cash rate at 5.50%. The central bank meets next on November 29th and is expected to pause again. The RBNZ is confident that inflation will fall more quickly, projecting an inflation rate of 2.7% by Q3 of 2024.

China is New Zealand’s largest trading partner, which means the New Zealand dollar is sensitive to Chinese releases. China has been grappling with an economic slowdown, manifested by deflationary pressures. On Thursday, China releases consumer inflation data.

CPI came in at 0.0% y/y in September and the market consensus for October is -0.1%. On a monthly basis, inflation is expected to fall in October from 0.2% to 0.0%. A soft inflation release could unnerve investors and send the New Zealand dollar lower.

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NZD/USD Technical

• NZD/USD continues to test support at 0.5929. The next support line is 0.5858
• There is resistance at 0.5996 and 0.6069

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