New Zealand dollar drifting

NZD/USD has been on a downswing this week, falling close to 1%. The currency is almost unchanged today, ahead of the release of New Zealand Manufacturing Sales later today.

US core CPI expected to fall

One of this week’s highlights is the US inflation report for May, which will be released on Friday. Headline CPI is expected to remain unchanged at 8.3%, while core CPI is forecast to fall to 5.9%, down from 6.2%. A drop in the core reading will raise speculation that we’ve hit an inflation peak, although I would caution against any sweeping conclusions based on a decline in one month.

The RBNZ finds itself in the middle of its aggressive rate-tightening cycle. The Bank raised the cash rate to 2.0% in late May, up from 1.50%. Governor Orr has stated that he is looking to raise rates to 4% by mid-2023, which means that investors can expect plenty of tightening, which could mean additional 50-bps hikes. The RBNZ’s chief economist, Paul Conway, has acknowledged that a soft landing amidst aggressive rate hikes is “difficult to engineer” but said the economy was strong enough to handle a downturn due to the strong labour market. The RBNZ is carefully monitoring inflation expectations, which like CPI, are yet to show any signs of easing. Inflation is running at 6.9%, its highest level in 30 years, while unemployment is at a record low of 3.2%.

As is the case with other major central banks which are tightening policy, the RBNZ will have a tough challenge in ensuring that the economy has a soft landing as higher rates result in slower economic activity. A recession is a constant worry for the central bank, which could emanate from the housing sector, as higher mortgage rates could have a crushing effect on highly indebted households.

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NZD/USD Technical

• NZD is testing resistance at 0.6453. Above, there is resistance at 0.6514
• 0.6399 and 0.6338 are providing support

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